Parker Company uses a perpetual inventory system. It entered into the following calendar-year 2005?

Question

Purchases and sales transactions:

Alternative cost flows—perpetual
Jan. 1 Beginning inventory . . . . . . . 600 units @ $44/unit
Feb. 10 Purchase . . . . . . . . . . . . . . . 200 units @ $40/unit
Mar. 13 Purchase . . . . . . . . . . . . . . . 100 units @ $20/unit
Mar. 15 Sales . . . . . . . . . . . . . . . . . . 400 units @ $75/unit
Aug. 21 Purchase . . . . . . . . . . . . . . . 160 units @ $60/unit
Sept. 5 Purchase . . . . . . . . . . . . . . . 280 units @ $48/unit
Sept. 10 Sales . . . . . . . . . . . . . . . . . . 200 units @ $75/unit
Totals . . . . . . . . . . . . . . . . . 1,340 units 600 units

1. Compute cost of goods available for sale and the number of units available for sale.
2. Compute the number of units in ending inventory.
3. Compute the cost assigned to ending inventory using (a) FIFO, (b) LIFO, (c) specific identification
(Note: The units sold consist of 500 units from beginning inventory and 100 units from the
March 13 purchase), and (d) weighted average.
4. Compute the gross profit earned by the company for each of the four costing methods in part 3.
Analysis Component
5. If the company’s manager earns a bonus based on a percent of gross profit, which method of inventory
costing will the manager likely prefer?
Check (3) Ending inventory: FIFO,
$33,040; LIFO, $35,440;WA, $34,055;
(4) LIFO gross profit, $21,000

Answer 1

1. Compute cost of goods available for sale and the number of units available for sale
$59,440; 1,340 units

2. Compute the number of units in ending inventory.
740 units

3. Compute the cost assigned to ending inventory using
(a) FIFO $33,040,
(b) LIFO $35,440,
(c) specific identification $35,440
(d) weighted average $34,055.
4. Compute the gross profit earned by the company for each of the four costing methods in part 3.
Gross profit FIFO $18,600
Gross profit LIFO $21,000
Gross profit SI $21,000
Gross profit WA $19,615

Analysis Component
5. If the company’s manager earns a bonus based on a percent of gross profit, which method of inventory
costing will the manager likely prefer?
The manager will likely prefer either the LIFO or Specific Identification methods since both give a higher gross profit than the other 2 mthds and his bonus will accordingly be higher.

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