Chapter 8, Problem 8.11P

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.

First-in-First-Out (FIFO): 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.

Last-In, First-Out (LIFO): In Last-in-First-Out method, the cost of last purchased items are sold first. The value of the closing stock consists the initial purchased items.

Gross profit ratio 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. It is calculated by using the following formula:

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

To Compute: The gross profit and gross profit ratio for 2017.

Explanation of Solution

Compute the gross profit and gross profit ratio.

Gross Profit Ratio
Details	Amount ($)
Net Sales (A)	54,000,000 (1)
Less: Cost of Goods Sold	(27,000,000) (2)
Gross Profit (B)	27,000,000
Gross Profit Ratio (B ÷ A)	50%

Table (1)

Working Notes:

Compute the sales revenue.

$\begin{array}{c}\text{Sales Revenue}=\text{Number of Units Sold}\times \text{Selling Price}\\ =\text{\$27,000}\times \text{\$2,000}\left(\$1,000\times 200\%\right)\\ =\$54,000,000\end{array}$ (1)

Compute cost of goods sold.

$\begin{array}{c}\text{Cost of goods sold}=\text{Sales units}\times \text{Cost per unit}\\ =\left(27,000\text{ Units }\times \text{ \$1,000}\right)\\ \text{=}\text{\$27,000,000}\end{array}$ (2)

Therefore, the gross profit and gross profit ratio is $27,000,000 and 50% respectively.

2.

To determine

To Compute: The gross profit and gross profit ratio for 2017 assuming 15,000 units are purchased during 2017.

Explanation of Solution

Compute the gross profit and gross profit ratio.

Gross Profit Ratio
Details	Amount ($)
Net Sales (A)	54,000,000 (1)
Less: Cost of Goods Sold (Refer Table 3)	(25,000,000)
Gross Profit (B)	29,000,000
Gross Profit Ratio (B ÷ A)	53.7%

Table (2)

Working Notes:

Compute the sales revenue.

$\begin{array}{c}\text{Sales Revenue}=\text{Number of Units Sold}\times \text{Selling Price}\\ =\text{\$27,000}\times \text{\$2,000}\left(\$1,000\times 200\%\right)\\ =\$54,000,000\end{array}$ (1)

Compute cost of goods sold.

Calculation of Cost of Goods Sold
Details	Number of Units	Rate per Unit ($)	Total Cost ($)
2017	15,000	1,000	15,000,000
2016	6,000	900	5,400,000
2016	4,000	800	3,200,000
2016	2,000	700	1,200,000
Cost of Goods Sold	27,000		25,000,000

Table (3)

Therefore, the gross profit and gross profit ratio is $29,000,000 and 53.7% respectively.

3.

To determine

To Explain: The effects due to the decrease in inventory in gross profit and gross profit ratio using LIFO method.

Explanation of Solution

C Incorporation has sold 27,000 units and purchased 15,000 units during 2017. When current sales are higher than current purchases during a period, LIFO liquidation occurs. It occurs when a company uses the Last in, First out (LIFO) method for inventory costing.

Hence, the gross profit computed in requirement 1 (Assuming the company purchased 28,000 units) is lower than requirement 2 (Assuming the company purchased 15,000 units).

Thus, in this case, the decrease in inventory quantity results in LIFO Liquidation Profit. If the company had purchased at least the number of units sold (27,000) during 2017, then there would no LIFO Liquidation. In this case, the LIFO Liquidation profit is $2,000,000 (Computed below) is material. Hence, C Incorporation must disclose it in a note.

Calculate the LIFO liquidation profit.

LIFO Liquidation Profit
Units Liquidated	Current Cost ($)	Acquisition Cost ($)	Difference between Current and Acquisition Cost ($)	Profit ($)
B	C	D	[C – D]	[B× E]
6,000	1,000	900	100	600,000
4,000	1,000	800	200	800,000
2,000	1,000	700	300	600,000
LIFO Liquidation Profit				2,000,000

Table (4)

4.

To determine

To Compute: The gross profit and gross profit ratio for 2017 assuming C Incorporation used FIFO.

Explanation of Solution

Compute the gross profit and gross profit ratio.

Gross Profit Ratio
Details	Amount ($)
Net Sales (A)	54,000,000 (1)
Less: Cost of Goods Sold	(24,100,000) (3)
Gross Profit (B)	29,900,000
Gross Profit Ratio (B ÷ A)	55.4%

Table (5)

Working Note:

Compute cost of goods sold.

Calculation of Cost of Goods Sold
Details	Number of Units	Rate per Unit ($)	Total Cost ($)
2016	5,000	700	3,500,000
2016	4,000	800	3,200,000
2016	6,000	900	5,400,000
2017	12,000	1,000	12,000,000
Cost of Goods Sold	27,000		24,100,000

Table (6)

Therefore, the gross profit and gross profit ratio is $29,900,000 and 55.4% respectively.

5.

To determine

To Explain: The effects due to the decrease in inventory in gross profit and gross profit ratio using FIFO method.

Explanation of Solution

When FIFO method is used for inventory, then the number of units purchased has no effect on the cost of goods sold. This is because, in FIFO, at first the beginning inventory costs are included in the computation of cost of goods sold regardless of the inventory purchased during the current period.

Therefore, the gross profit computed assuming 28,000 units purchased during 2017 is same as it is computed assuming 15,000 units purchased during 2017.