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P ROBLEM #2: INVENTORY Mmm Good, Inc. sells fairly traded, organic coffee by the

ID: 2588288 • Letter: P

Question

PROBLEM #2: INVENTORY

Mmm Good, Inc. sells fairly traded, organic coffee by the pound (“lb”).   Presented below is the information for December. The company uses a perpetual inventory system and the FIFO cost flow assumption. All purchases and sales are made on account. A physical inventory count indicates that the ending inventory on Dec 31 is 40 lbs.

Dec 1     Beginning Inventory                       50 lbs @ $5.00/lb

Dec 10   Sale                                                        40 lbs @ $8.00/lb

Dec 15   Purchase                                             60 lbs @ $6.00/lb

Dec 24   Sale                                                        30 lbs @ $8.00/lb

Required: Prepare all necessary journal entries.

Date

Journal Entries

Dec 10

Dec 15

Dec 24

Required: Calculate gross profit.

Required: Would gross profit be higher or lower if the LIFO method was used? Explain why.

Date

Journal Entries

Dec 10

Dec 15

Dec 24

Explanation / Answer

Journal:

workings:

LIFO workings:

Using LIFO profit is 180, with FIFO it is 190. Gross profit is lower if FIFO is used.

Date Account Debit Credit Dec 10 Accounts receivable 320 Sales 320 [sales recorded] Cost of goods sold 200 Inventory 200 [Cost of goods sold recorded] Dec.15 Inventory 360 Accounts payable 360 [Purchases recorded] Dec 24 Accounts receivable 240 Sales 240 [sales recorded] Cost of goods sold 170 Inventory 170 [Cost of goods sold recorded]