Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 6: Q 20-4 (page 363)

Assume that AB Tire Store completed the following perpetual inventory transactions for a line of tires:

May 1 Beginning merchandise inventory 16 tires @ \( 65 each

11 Purchase 10 tires @ \) 78 each

23 Sale 12 tires @ \( 88 each

26 Purchase 14 tires @ \) 80 each

29 Sale 18 tires @ $ 88 each

Requirements

4. Which method results in the largest gross profit, and why?

Short Answer

Expert verified

FIFO method would result in the highest gross profit due to valuing issued inventory (COGS) at the historical prices and yielding the lowest COGS.

Step by step solution

01

Step-by-Step-SolutionStep 1: Gross profit under FIFO, LIFO, and Average Method

In the given case, the gross profit computed under each method is as follows –

Gross Profit

FIFO

$500

LIFO

$350

Weighted Average

$450

The method that has resulted in the highest gross profits is the FIFO method.

02

Reason for the FIFO method to yield the highest gross profit

FIFO method computes the cost of issued inventory on a historical basis. So, in comparison to other methods, the cost computation under FIFO would always be lower. The reason is that the market prices have a general trend of rising. So the cost today would always be lower than the cost tomorrow.

In such a case FIFO method would always fetch the highest profit.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Question:Assume that Toys Galore store bought and sold a line of dolls during December as follows:

Dec. 1 Beginning merchandise inventory 13 units @ \( 9 each

8 Sale 8 units @ \) 22 each

14 Purchase 16 units @ \( 14 each

21 Sale 14 units @ \) 22 each

Requirements

2. Compute the cost of goods sold, cost of ending merchandise inventory, and grossprofit using the LIFO inventory costing method.

Question:Super Mart, a regional convenience store chain, maintains milk inventory by the gallon.

The first month’s milk purchases and sales at its Freeport, Florida, location follow:

Nov. 2 Purchased 11 gallons @ \(2.15 each

6 Purchased 2 gallons @ \)2.80 each

8 Sold 6 gallons of milk to a customer

13 Purchased 3 gallons @ $2.85 each

14 Sold 4 gallons of milk to a customer

Requirements

1. Determine the amount that would be reported in ending merchandise inventoryon November 15 using the FIFO inventory costing method.

Question:Assume that Toys Galore store bought and sold a line of dolls during December as follows:

Dec. 1 Beginning merchandise inventory 13 units @ \( 9 each

8 Sale 8 units @ \) 22 each

14 Purchase 16 units @ \( 14 each

21 Sale 14 units @ \) 22 each

Requirements

4. Which method results in a higher cost of ending merchandise inventory?

Steel It began January with 55 units of iron inventory that cost \(35 each. During January, the company completed the following inventory transactions:

Units Unit Cost Unit Sales Price

Jan. 3 Sale 45 \) 83

8 Purchase 75 $ 52

21 Sale 70 85

30 Purchase 10 55

Requirements

1. Prepare a perpetual inventory record for the merchandise inventory using theFIFO inventory costing method.

What is the goal of conservatism?
See all solutions

Recommended explanations on Business Studies Textbooks

Managerial Economics

Read Explanation

Nature of Business

Read Explanation

Intermediate Accounting

Read Explanation

Business Development

Read Explanation

Organizational Behavior

Read Explanation

Managers

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free