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Accounting for Managers

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The beginning inventory of merchandise at Waldo Company and data on purchases and sales for a three-month period are as follows: Date | Transaction | No. of units | Per Unit | Total | March 3 | Inventory | 60 | $ 1,500 | $ 90,000 | March 8 | Purchase | 120 | 1,800 | 216,000 | March 11 | Sale | 80 | 5,000 | 400,000 | March 30 | Sale | 50 | 5,000 | 250,000 | April 8 | Purchase | 100 | 2,000 | 200,000 | April 10 | Sale | 60 | 5,000 | 300,000 | April 19 | Sale | 30 | 5,000 | 150,000 | April 28 | Purchase | 100 | 2,200 | 220,000 |

Required: 1. Record the inventory, purchases and cost of goods sold in a Perpetual Inventory record using the FIFO method.

2. Determine the total sales and the total cost of goods sold for the period. Journalize the entries in the sales and cost of goods sold account. Assume that all sales were on account.

3. Determine the gross profit from sales for the period.
Sales Revenue: $400,000 + $250,000 + $300,000 + $150,000 = $1,100,000
Cost of Goods Sold: $126,000 + $90,000 + $110,000 + $60,000 = $386,000
Gross Profit: Sales Revenue – Cost of Goods Sold $1,100,000 - $386,000 = $714,000

4. Determine the ending inventory value at LCM (Market price $ 1800 per unit).

5. Discuss which method (FIFO or LIFO) would be preferred for income tax purposes in periods of:

a) Rising prices and I. FIFO gives a better indication of the ending inventory value. II. FIFO increases net income because old inventory (lower price) is used to value the cost of goods sold. This increases company taxes. III. LIFO is not a good indication of the ending inventory value. IV. LIFO results in lower net income because cost of goods sold is higher. This decreases company taxes.

b) Declining prices. I. LIFO gives a better indication of the ending inventory value.

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