Liberty Company reported the following January purchase and sales data for its o

Question

Liberty Company reported the following January purchase and sales data for its only product. Liberty uses a perpetual inventory system. Ending inventory consists of 225 units, 100 from the January 30 purchase, 80 from the January 20 purchase, and 45 from beginning inventory. Determine the cost assigned to ending inventory and to cost of goods sold using (a) specific identification, (b) weighted average, (c) FIFO, and (d) LIFO. Use the data in Exercise 6-1 to prepare comparative income statements for the month of January for Liberty Company similar to those shown in Exhibit 6.8 for the four inventory methods. Assume expenses are $1,250, and that the applicable income tax rate is 30 %. Which method yields the highest net income? Does net income using weighted average fall between that using FIFO and LIFO? If costs were rising instead of failing, which method would yield the highest net income?

Explanation / Answer

Although it was quite difficult to look at the shot that you provided I got the question and answering them now:).

1) LIFO will produce the highest gross profit which will eventually result in highest net profit as prices are decreasing gradually over the period.

2) Yes, Weighted average method will produce will have a net profit in between FIFO and LIFO as he does not include the increase or decrease of price, as it sums the cost and then divides it with the total number of units available for sale thus each unit has a equal price.

3) FIFO will produce the highest net profit in times of increasing cost as that will result in an increase of end period inventory which will decease cost of goods sold, thus providing the highest net profit in times of increasing costs.

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