Chapter 6, Problem 6.5AP

(a)

(1)

To determine

Periodic Inventory System: It is a system in which the inventory is updated in the accounting records on a periodic basis such as at the end of each month, quarter or year. In other words, it is an accounting method which is used to determine the amount of inventory at the end of each accounting period.

Inventory cost flow: It refers to the flow (movement) of inventory when it is purchased or sell by the business organization.

The various inventory cost flow methods are:

• First-in, first-out (FIFO)
• Last in, first-out (LIFO)
• Average-cost

FIFO method: In FIFO method, those goods are sold first which are purchased first by the business organization.

LIFO method: In LIFO method, those goods are sold first which are purchased in last by the business organization.

Average-cost method: In average-cost method, the value of inventory is calculated by the average of cost of goods sold which are available for the sale purpose for that period.

Gross Profit: It is that profit which is computed by deducting Cost of goods sold from the net sales (Sales after deducting Sales Return and allowances, Sales Discounts).

Gross Profit Rate: It is the financial ratio that evaluates the money left out of the total revenues after deducting the cost of goods sold. Thus, it shows the relationship between the gross profit on sales and net sales.

To determine: The cost of (i) ending inventory (ii) cost of goods sold (iii) gross profit, and (iv) gross profit rate under LIFO.

(2)

To determine

The cost of (i) ending inventory (ii) cost of goods sold (iii) gross profit, and (iv) gross profit rate under FIFO

(3)

To determine

(a) The cost of (i) ending inventory (ii) cost of goods sold (iii) gross profit, and (iv) gross profit rate under average cost method.

(b)

To determine

Comparison of results of each cost-flow method.