Exercise-8 (FIFO and LIFO under periodic and perpetual system)

The Breeze trading company discloses the following information for the month of August 2016.

  • Aug. 01: Beginning inventory, 600 units @ $5 each each.
  • Aug. 10: Sold 400 units @ $12 each.
  • Aug. 11: Purchased 1,600 units @ $6 each.
  • Aug. 15: Sold 1,000 units @ $12.50 each.
  • Aug. 20: Purchased 1,000 units @ $6.50 each.
  • Aug. 27: Sold 600 units @ $13.50 each.

Required:

  1. Assume the Breeze trading company uses periodic inventory system, compute cost of goods sold (COGS), ending inventory and gross profit under:
    (a). FIFO
    (b). LIFO
  2. Assume the Breeze company uses perpetual inventory system, compute cost of goods sold (COGS), ending inventory and gross profit under:
    (a). FIFO
    (b). LIFO
  3. Explain the reason of higher gross profit under FIFO than LIFO?

Solution:

(1) If Breeze trading company uses periodic inventory method:

Ending inventory in units = Beginning inventory + Purchases – Sales

= 600 units + 2,600 units – 2,000 units

= 1,200 units

a. FIFO method:

i. Cost of ending inventory under periodic-FIFO

exercise-8-icm-img1

ii. Cost of goods sold under periodic-FIFO:

exercise-8-icm-img2

OR

exercise-8-icm-img3

iii. Gross profit under periodic-FIFO:

exercise-8-icm-img4

*(400 units × $12) + (1,000 units × $12.50) + (600 units × $13.50)

 (b). LIFO method:

i. Cost of ending inventory under periodic-LIFO

exercise-8-icm-img5

ii. Cost of goods sold under periodic-LIFO:

exercise-8-icm-img6

exercise-8-icm-img7

iii. Gross profit under periodic-LIFO:

exercise-8-icm-img8

(2) If Breeze trading company uses perpetual inventory method:

(a). Perpetual-FIFO:

We need to prepare a perpetual inventory card using FIFO method to find ending inventory, cost of goods sold and gross profit.

exercise-8-icm-img9

i. Cost of ending inventory under perpetual-fifo:

$7,700 (see last row of balance column).

ii. Cost of goods sold under perpetual-fifo:

$2,000 + $5,800 + $3,600 = $11,400 (total of sales column)

iii. Gross profit under perpetual-fifo:

Sales – Cost of goods sold

= $25,400 – $11,400

= $14,000

(b). Perpetual-LIFO:

We need to prepare a perpetual inventory card using LIFO method to find ending inventory, cost of goods sold and gross profit.

exercise-8-icm-img10

i. cost of ending inventory under perpetual-lifo:

$7,200 (see last row of balance column)

ii. Cost of goods sold under perpetual-lifo:

$2,000 + $6,000 + $3,900 = $11,900 (total of sales column)

iii. Gross profit under perpetual-lifo:

Sales – cost of goods sold

= $25,400 – $11,900

= $13,500

3. The reason of higher gross profit under FIFO than LIFO:

Under LIFO cost flow assumption, the most recent costs are matched against revenues, whereas under FIFO cost flow assumption, the oldest costs are matched against revenues. In inflationary environment (an economic situation where prices continuously rise), the FIFO produces higher gross profit than LIFO. The reverse is true in a deflationary environment (an economic situation where prices continuously decrease).

In this exercise, the prices are rising therefore the FIFO produces a higher gross profit than LIFO.

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18 Comments on Exercise-8 (FIFO and LIFO under periodic and perpetual system)

  1. rani

    its nice thanks alot me learn form it very much

  2. rani

    its nice thanks alot

  3. Amna Ahmed

    Very Impressive lesson. Clears my confusion about Ending inventory in Perpetual System.

    1. Edmond

      Wow! It’s amazing

  4. Goodluck

    Thanks a lot. I was given this as an assignment and it was really a hard nut for me to crack. Now I can smile

  5. waqar younis

    What if issue units are greater than balance available units at the end under lifo perpetual inventory system…kindly update… balance available 3,500 units while we have to issue 5,000 units at the end…

  6. Nelmex

    Really helpful and informative. Giving me some better ideas now.

  7. Nathan

    Loved it..thanks

  8. amna ahmed

    how we have got 6.50 units in fifo method?

  9. garry

    pls provide me some numericals for practice

  10. Habib Momen

    Really helpful
    But we have a question like this:
    J&co receipt and issue record is:
    Date. Receipt. Issue
    Jan-1. Opening balance 50@10/unit
    Jan-8. 200 units@11/unit
    Jan-11 150 units
    Jan-13. 150 units@12/unit
    Jan-18. 100 units@13/unit
    Jan-20. 200 units
    Prepare inventory sheet (bin card) by average method in perpetual and periodic.
    Kindly solve this for me

  11. chernet mamush

    thanks so much

  12. Julie David

    very helpful

  13. Mohamed hassan

    helpfully thankz

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