Periodic Inventory System: Periodic inventory system 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. 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. 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. Moving -average cost method: Under moving 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. Following is the mathematical representation: Gross Profit Rate: Gross is the financial ratio that shows the relationship between the gross profit and net sales. It represents gross profit as a rate of net sales. Gross Profit is the difference between the net sales revenue, and the cost of goods sold. It can be calculated by using the following formula: Gross profit percentage = Gross profit Net sales × 100 To Calculate: The ending inventory, cost of goods sold, gross profit, and gross profit rate under LIFO, FIFO, and Average-cost method.

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Chapter 6, Problem 6.5BP

(a)

To determine

Periodic Inventory System:

Periodic inventory system 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.

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.

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.

Moving -average cost method:

Under moving 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. Following is the mathematical representation:

Gross Profit Rate:

Gross is the financial ratio that shows the relationship between the gross profit and net sales. It represents gross profit as a rate of net sales. Gross Profit is the difference between the net sales revenue, and the cost of goods sold. It can be calculated by using the following formula:

Gross profit percentage =Gross profitNet sales×100

To Calculate: The ending inventory, cost of goods sold, gross profit, and gross profit rate under LIFO, FIFO, and Average-cost method.

(b)

To determine

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

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