Chapter 5, Problem 4AE

a.

To determine

Compute the gross margin for Company M using the FIFO cost flow assumption.

Explanation of Solution

(1)

First-in-First-Out:

In First-in-First-Out method, the costs of the initially purchased items are considered as cost of goods sold, for the items which are sold first. The value of the ending inventory consists of the recent purchased items.

Compute the gross margin for Company M using the FIFO cost flow assumption as follows:

FIFO	Units	Unit Cost (in $)	Amount (in $)	Cost of Goods Sold (in $)
Sales	370	90		33,300
Less: Cost of goods sold:
Beginning inventory	90	40	3,600
Purchases	280	45	12,600	(16,200)
Gross margin	1,500			$17,100

Table (1)

Hence, the gross margin for Company M using the FIFO cost flow assumption is $17,100.

(2)

Last-in-Last-Out:

In Last-in-First-Out method, the costs of last purchased items are considered as the cost of goods sold, for the items which are sold first. The value of the closing stock consists of the initial purchased items.

Compute the gross margin for Company M using the LIFO cost flow assumption as follows:

LIFO	Units	Unit Cost (in $)	Amount (in $)	Cost of Goods Sold (in $)
Sales	370	90		33,300
Less: Cost of goods sold:
Purchases	310	45	13,950
Beginning inventory	60	40	2,400	(16,350)
Gross margin	1,500			$16,950

Table (2)

Hence, the gross margin for Company M using the LIFO cost flow assumption is $16,950.

 (3)

Weighted-average cost method:

Under Weighted average cost method, the company calculates a new average cost after every purchase is made. It is determined by dividing the cost of goods available for sale by the units on hand.

Compute the gross margin for Company M using the weighted average cost flow assumption as follows:

Weighted Average	Units	Unit Cost (in $)	Amount (in $)	Cost of Goods Sold (in $)
Sales	370	90		33,300
Less: Cost of goods sold:
Average cost per unit	370	43.875	16,234	(16,234)
Gross margin	1,500			$17,066

Table (3)

Working Note:

Compute the average unit cost:

$\begin{array}{c}\text{Cost per unit}=\frac{\text{Total cost}}{\text{Total Units}}\\ =\frac{\left(\$3,600\left(\text{Table 1}\right)+\$13,950\left(\text{Table 2}\right)\right)}{400}\\ =\frac{\$17,550}{400}\\ =\text{\$43}\text{.875}\end{array}$

Hence, the gross margin for Company M using the weighted average cost flow assumption is $17,066.

b.

To determine

Ascertain the amount of net income using FIFO, LIFO, and weighted average.

Explanation of Solution

Net Income:

Net income is the sum total of all the revenues generated in a particular accounting period after deducting cost of goods sold and expenses and losses, such as rent expense, depreciation of that particular accounting period.

Ascertain the amount of net income using FIFO, LIFO, and weighted average as follows:

	FIFO	LIFO	Weighted Average
Sales	$33,300	$33,300	$33,300
Less: Cost of Goods Sold	(16,200)	(16,350)	(16,234)
Gross Margin	17,100	16,950	17,066
Less: Operating Expenses	4,100	4,100	4,100
Net Income	$13,000	$12,850	$12,966

Table (4)

Hence, the amount of net income using FIFO, LIFO, and weighted average are $13,000, $12,850, and $12,966 respectively.

c.

To determine

Compute the amount of ending inventory using FIFO method.

Explanation of Solution

Ending Inventory:

It represents the quantity and price of the goods unsold and laying at the store at the end of a particular period.

(1)

Compute the amount of ending inventory using FIFO method as follows:

	Units	Unit Cost (in $)	Ending Inventory (in $)
FIFO	30	45	1,350

Table (5)

(2)

Compute the amount of ending inventory using LIFO method as follows:

	Units	Unit Cost (in $)	Ending Inventory (in $)
LIFO	30	40	1,200

Table (6)

(3)

Compute the amount of ending inventory using weighted average method as follows:

	Units	Unit Cost (in $)	Ending Inventory (in $)
Weighted Average	30	43.875	1,316

Table (7)