Chapter 6, Problem 6.6AP

(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.

In First-in-First-Out method, the cost of initial purchased items are sold first. The value of the ending inventory consists the recent purchased items.

To Determine:  The selection of diamonds for selling that should follow by J Gems to maximize the gross profit.

Explanation of Solution

To maximize gross profit, J Gems should sell the diamonds with the lowest cost.

Calculate cost of goods sold and sales revenue.

Date	Cost of goods sold			Sales revenue
	Units	Cost ($)	Total cost ($)	Units	Cost ($)	Total cost ($)
	(A)	(B)	(C) = (A) × (B)	(D)	(E)	(F) = (D) × (E)
March 5	150	310	46,500	180	600	108,000
	30	350	10,500	390	650	253,500
March 25	170	350	59,500
	220	375	82,500
Total	570		199,000	570		361,500

Table (1)

Calculate gross profit.

$\begin{array}{c}\text{Gross profit = }\left(\begin{array}{l}\text{Sales revenue}-\\ \text{Cost of goods sold}\end{array}\right)\\ =\left(361,500-\$199,000\right)\\ =\$162,500\end{array}$

Conclusion

Therefore, the gross profit is $162,500.

(2)

To determine

  The selection of diamonds for selling that should follow by J Gems to minimize the gross profit.

Explanation of Solution

To minimize gross profit, J Gems should sell the diamonds with the highest cost.

Calculate cost of goods sold and sales revenue.

Date	Cost of goods sold			Sales revenue
	Units	Cost ($)	Total cost ($)	Units	Cost ($)	Total cost ($)
	(A)	(B)	(C) = (A) × (B)	(D)	(E)	(F) = (D) × (E)
March 5	180	350	63,000	180	600	108,000
				390	650	253,500
March 25	330	375	123,750
	20	350	7,000
	40	310	12,400
Total	570		$206,150	570		$361,500

Table (2)

Calculate gross profit.

$\begin{array}{c}\text{Gross profit = }\left(\begin{array}{l}\text{Sales revenue}-\\ \text{Cost of goods sold}\end{array}\right)\\ =\left(361,500-\$206,150\right)\\ =\$155,350\end{array}$

Conclusion

Therefore, the gross profit is $155,350.

(b)

To determine

To Calculate: The cost of goods sold and gross profit under FIFO method.

Explanation of Solution

Calculate cost of goods sold.

Step 1: Calculate cost of goods available for sale.

Cost of Goods Available for Sale
Date	Particulars	Units ($)	Unit cost ($)	Total cost ($)
		(a)	(b)	(c = a × b)
March 1	Beginning inventory	150	310	46,500
March 3	Purchase	200	350	70,000
March 10	Purchase	330	375	123,750
	Total	680		$240,250

Table (3)

Step 2: Calculate ending inventory under FIFO method.

FIFO Method
Date	Units	Unit cost ($)	Total cost ($)
	(a)	(b)	(c = a × b)
March 10	110	375	41,250
Total	110		41,250

Table (4)

Step 3: Calculate cost of goods sold under FIFO method.

Particulars	Amount ($)
Cost of goods available for sale	240,250
Less: Ending inventory	(41,250)
Cost of goods sold	$199,000

Table (5)

Calculate gross profit.

Gross Profit - FIFO
Details	Amount ($)
Sales	361,500
Less: Cost of goods sold	(199,000)
Gross profit	$162,500

Table (6)

(c)

To determine

To Calculate: The cost of goods sold and gross profit under LIFO method.

Explanation of Solution

Calculate cost of goods sold.

Step 1: Calculate cost of goods available for sale.

Cost of Goods Available for Sale
Date	Particulars	Units ($)	Unit cost ($)	Total cost ($)
		(a)	(b)	(c = a × b)
March 1	Beginning inventory	150	310	46,500
March 3	Purchase	200	350	70,000
March 10	Purchase	330	375	123,750
	Total	680		$240,250

Table (7)

Step 2: Calculate ending inventory under LIFO method.

LIFO Method
Date	Units	Unit cost ($)	Total cost ($)
	(a)	(b)	(c = a × b)
March 10	110	310	34,100
Total	110		$34,100

Table (8)

Step 3: Calculate cost of goods sold under LIFO method.

Particulars	Amount ($)
Cost of goods available for sale	240,250
Less: Ending inventory	(34,100)
Cost of goods sold	$206,150

Table (9)

Calculate gross profit.

Gross Profit - LIFO
Details	Amount ($)
Sales	361,500
Less: Cost of goods sold	(206,150)
Gross profit	$155,350

Table (9)

(d)

To determine

To Explain: The cost flow method that should use by J Gems.

Explanation of Solution

J Gems should select FIFO method because, the ending inventory and gross profit amount is greater than the LIFO method.