Jepson Electronic Center began in October with 90 units of merchandise inventory

Question

Jepson Electronic Center began in October with 90 units of merchandise inventory that cost $70 each. During October, the store made the following purchases:

Jepson uses the periodic inventory system, and the physical count at October 31 indicates that 110 units of merchandise inventory are on hand. Based on this data, answer the following:

1. Determine the ending merchandise inventory and cost of goods sold amounts for the October financial statements using the FIFO, LIFO, and weighted-average inventory costing methods.

2. Sales revenue for October totaled $27,000. Compute Jepson’s gross profit for October using each method.

3. Which method will result in the lowest income taxes for Jepson and why?

4. Which method will result in the highest net income for Jepson and why?

3-Oct 20 units at $75 each 12-Oct 40 units at $78 each 18-Oct 60 units at $84 each

Explanation / Answer

Value of inventory and Cost of Good sold

1) FIFO

Value of Closing inventory S8910

COGS = opening stock+ purchase - Closing stock

= $6300+$9660-$8910

= $ 7050

Gross profit = Sales - cogs

=$ 27000-$ 7050

= 19950

LIFO

7800

Closing inventory 110 unit value  $7800

COGS = $ 6300+$ 9660-$ 7800 =$ 8160

Gross profit = $ 27000-$8160

= $ 18840

3) Weighted Avg

Closing inventory $ 8360

COGS =$ 6300+$9660-$8360

= 7600

Gross profit =$ 27000-$ 7600

= $19400

3 ) LIFO method will result in lowest income tax as good are issue at high price and closing stock are valued at low price which result into decrease in profit.

4) FIFO method will result in highest income tax as good are issue at low price and closing stock are valued high price which will increase in profit.

FIFO method in $ Date Opening balance Rate Amt Purchase Rate Amt Issue Rate Amt Balance Rate Amt Oct-01 90 70 6300 Oct-03 20 75 1500 Oct-12 40 78 3120 Oct-18 60 84 5040 Oct 90 70 6300 10 75 750 Oct-31 10 75 750 40 78 3120 60 84 5040 Amt 90 6300 120 9660 100 7050 110 8910

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