Z Company: Beginning Inventory 70 units @ $13 Units Purchased 280 units @ $18 En

Question

Z Company:
Beginning Inventory 70 units @ $13
Units Purchased 280 units @ $18
Ending inventory consisted of 30 units. They sold 320 units at $30 ea. All purchases and sales were made with cash.

a. Compute the gross margin using the following cost flow assumptions. (FIFO, LIFO and weighted average).

b. What is the dollar amout of difference in net income between using FIFO v LIFO?

c. Determine the cash flow from operating activities, using each of the three cost flow assumptions ((FIFO, LIFO and weighted average). Ignore the effect of income taxes and explain why these cash flows have no differences.

Explanation / Answer

a. Compute the gross margin using the following cost flow assumptions. (FIFO, LIFO and weighted average).

FIFO Periodic Inventory method
===========================
Sales 320 units @ $30                             $9,600
Less : Cost of goods sold
          70 units @ $13            $910
         250 units @ $18       $4,500           $5,410
Gross Margin                                          $4,190

Ending Inventory 30 units $910 + $5,040 - $5,410 = $540

LIFO Periodic Inventory method
============================
Sales 320 units @ $30                             $9,600
Less : Cost of goods sold
          280 units @ $18         $5,040
           40 units @ $13             $520        $5,560
Gross Margin                                          $4,040

Ending Inventory 30 units $910 + $5,040 - $5,560 = $390

Weighted Average Periodic Inventory method
===================================
Weighted Average cost per unit = (70 x $13) + (280 x $18) / (70+280)
= ($910 + $5040) / 350 = $17.00 per unit

Sales 320 units @ $30                             $9,600
Less : Cost of goods sold
          320 units @ $17                            $5,440
Gross Margin                                          $4,160

Ending Inventory $910 + $5,040 - $5,410 = $540

b. What is the dollar amout of difference in net income between using FIFO v LIFO?
      Net income $150 more than the Net income under LIFO i.e. ($4,190 - $4,040)

c. Determine the cash flow from operating activities, using each of the three cost flow assumptions ((FIFO, LIFO and weighted average). Ignore the effect of income taxes and explain why these cash flows have no differences.

                                   FIFO          LIFO    W/Average
Net Income                   $4,190      $4,040     $4,160
Change in Inventory
(70x$13) - (30x$18)        $370
(70x$13) - (30x$13)                        $520
(70x$13) - (30x$17)                                       $400
                                $4,560       $4,560     $4,560
        

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