Question

Gazin Inc. was in business for four years. The following table shows its purchases and sales during that four-year period.

	Purchases Units	Purchases Unit Costs	Sales Units	Sales Unit Costs
Year 1	12,000	$10	9,000	$15
Year 2	11,000	$11	10,000	$17
Year 3	10,000	$12	11,000	$19
Year 4	9,000	$13	12,000	$21
TOTALS	42,000		42,000

Note: In order to calculate income you need to calculate cost of goods sold

REQUIRED:

1. Compute income for each of the four years assuming FIFO cost flow.
2. Compute income for each of the four years assuming LIFO cost flow.
3. Compare total income over the four-year period. Does the cost flow assumption matter?

Answer 1

	A	B	C	D	E	A+B-D	D*E	FIFO METHOD
Year	Opening inventory	Purchase unit	Purchase unit cost	sale unit	sale unit cost	Closing inventory	Total Sales	Total purchases cost	Profit
1	0	12000	10	9000	15	3000	135000	90000	45000	(9000 units * 10 cost of purchases)
2	3000	11000	11	10000	17	4000	170000	107000	63000	( 3000 units of opening inventory priced at 10 and 7000 units of current year inventory priced at 11)
3	4000	10000	12	11000	19	3000	209000	128000	81000	( 4000 units of opening inventory priced at 11 and 7000 units of current year inventory priced at 12)
4	3000	9000	13	12000	21	0	252000	153000	99000	( 3000 units of opening inventory priced at 12 and 9000 units of current year inventory priced at 13)
	Total profit for all the years								288000
	A	B	C	D	E	A+B-D	D*E	LIFO METHOD
Year	Opening inventory	Purchase unit	Purchase unit cost	sale unit	sale unit cost	Closing inventory	Total Sales	Total purchases cost	Profit
1	0	12000	10	9000	15	3000	135000	90000	45000	(9000 units * 10 cost of purchases)
2	3000	11000	11	10000	17	4000	170000	110000	60000	(10000 units at 11)
3	3000 inventory of year 1 and 1000 units inventory of year 2	10000	12	11000	19	3000 inventory of year 1	209000	131000	78000	(10000 units at 12 and 1000 units at 11 of year 2)
4	3000 inventory of year 1	9000	13	12000	21	0	252000	147000	105000	(9000 units at 13 and 3000 units at 10 of year 1)
	Total profit for all the years								288000

On comparing profit for 4 years both the methods give us the same profit at the end. since there is No inventory at the end of 4 the year. In this case we can see there is difference of profits yearly due the change in method of inventory valuation. Since the Business is considered to be a going concern the cost flow assumption matters. In this case the cost flow assumption doesn't matter since there is no inventory at the end of 4th year