Topanga Group began operations early in 2018. Inventory purchase information for

Question

Topanga Group began operations early in 2018. Inventory purchase information for the quarter ended March 31, 2018, for Topanga's only product is provided below. The unit costs include the cost of freight. The company uses a periodic inventory system Unit Cost Date of Purchase Jan. 7 Feb. 16 March 22 Units 5,000 12,000 17,000 34,000 Total Cost $ 20,000 54,000 85,000 159,000 $4.00 4.50 5.00 Totals Sales for the quarter, all at $700 per unit, totaled 20,000 units leaving 14,000 units on hand at the end of the quarter Required 1. Calculate Topanga's cost of goods sold for the first quarter using a. FIFO b. LIFO c. Average cost 2. Calculate Toponga's gross profit ratio for the first quarter using FIFO, LIFO, and Average cost. 3. Comment on the relative effect of each of the three inventory methods on the gross profit ratio

Explanation / Answer

STATEMENT SHOWING INVENTORY RECORD UNDER PERIODIC FIFO METHOD RECIEPTS COST OF GOODS SOLD BALANCE DATE UNITS RATE AMOUNT $ UNITS RATE AMOUNT $ UNITS RATE AMOUNT $ Beg. Bal 0 0 0 Purchase 7-Jan 5000 4 20000 5000 4 20000 16-Feb 12000 4.5 54000 12000 4.5 54000 22-Mar 17000 5 85000 3000 5 15000 14000 5 70000 TOTAL 34000 159000 20000 89000 14000 70000 STATEMENT SHOWING INVENTORY RECORD UNDER PERIODIC LIFO METHOD RECIEPTS COST OF GOODS SOLD BALANCE DATE UNITS RATE AMOUNT $ UNITS RATE AMOUNT $ UNITS RATE AMOUNT $ Beg. Bal 0 0 0 Purchase 7-Jan 5000 4 20000 5000 4 20000 16-Feb 12000 4.5 54000 3000 4.5 13500 9000 4.5 40500 22-Mar 17000 5 85000 17000 5 85000 TOTAL 34000 159000 20000 98500 14000 60500 STATEMENT SHOWING INVENTORY RECORD UNDER PERIODIC WEIGHTED AVERAGE METHOD RECIEPTS COST OF GOODS SOLD BALANCE DATE UNITS RATE AMOUNT $ UNITS RATE AMOUNT $ UNITS RATE AMOUNT $ Beg. Bal 0 0 0 Purchase 7-Jan 5000 4 20000 16-Feb 12000 4.5 54000 22-Mar 17000 5 85000 TOTAL 34000 4.68 159000 20000 4.68 93600 14000 4.68 65400 Computation of Gross Profit: FIFO LIFO Average Sales 140000 140000 140000 Less: Cost of Goods sold 89000 98500 93600 Gross profit 51000 41500 46400 GROSS PROFIT RATIO: Gross Profit     / Net sales   = Gross profit ratio FIFO 51000     / 140000 36.43% LIFO 41500    / 140000 29.64% Average 46400    / 140000 33.14% In Situatio n of rising cost, LIFO results in higher cost of goods sold and therefore, a lower Gross profit ratio than FIFO

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