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.

FIFO: In First-in-First-Out method, items purchased initially are sold first. So, the value of the ending inventory consists the recent cost for the remaining unsold items.

LIFO: In Last-in-First-Out method, items purchased recently are sold first. So, the value of the ending inventory consists the initial cost for the remaining unsold items.

Average cost method: In average cost method the cost of inventory is priced at the average rate of the goods available for sale.

Formula for weighted average cost method:

$\text{Weighted-average Cost}=\frac{\text{Total Cost of Goods Available For Sale}}{\text{Total Number of Units Available For Sale}}$

Gross profit rate is the financial ratio that shows the relationship between the gross profit and net sales. Gross profit is the difference between the total revenues and cost of goods sold.

Formula for gross profit rate:

$\text{Gross profit rate}=\frac{\text{Gross profit}}{\text{Net sales}}\times 100$

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

(b)

To determine

To compare: The results for the above three cost flow assumptions.