19E_5 - 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

5. Which method results in a higher gross profit?

Step-by-Step Solution

Answer

The FIFO method would provide the highest gross profit.

Step-by-Step-Solution Step1: Gross Profit under FIFO

Under FIFO the COGS are valued at historic prices, so the gross profit would be highest.

The gross profit in the given case is $137.

Step 2: Gross profit under LIFO

Under LIFO the COGS are valued at current prices, so the gross profit would be lowest as the revenue would be matched with the highest COGS.

The gross profit in the given case is $112.