19E_3 - Horngren'S Financial And Managerial Accounting

Question

Question: Assume that Toys Galore store bought and sold a line of dolls during December as follows:

Dec. 1 Beginning merchandise inventory 13 units @ \( 9 each

8 Sale 8 units @ \) 22 each

14 Purchase 16 units @ \( 14 each

21 Sale 14 units @ \) 22 each

Requirements

3. Which method results in a higher cost of goods sold?

Step-by-Step Solution

Answer

The LIFO method would provide a higher cost of goods sold

Step-by-Step-Solution Step1: Cost of goods sold under FIFO and LIFO

Under FIFO cost of goods sold is valued at historical prices. Whereas, the cost of goods sold is valued at the current prices under the LIFO method.

 

So it depends upon the fluctuation of the market price to report the highest and lowest COGS under the two methods.

 

In case of rising prices, LIFO would provide a higher COGS. Whereas, in case of falling prices the FIFO would provide a higher COGS.

Step 2: COGS in the given case

In the given case, it can be seen that the cost price has been increased during the month.

So, in case of rising prices, LIFO would provide the highest COGS.

 

The COGS under the FIFO method was $347 and under the LIFO method was $372.