The Breeze trading company discloses the following information for the month of August 2013.

Aug. 01
Aug. 10
Aug. 11
Aug. 15
Aug. 20
Aug. 27

Beginning inventory:
Sales:
Purchases:
Sales:
Purchases:
Sales:

600 units @ $5 each

400 units @ $12 each
1,600 units @ $6
1000 units @ 12.50
1000 units @ $6.50
600 units @ $13.50

Required:
Assume the Breeze trading company uses periodic inventory system, compute cost of goods sold
(COGS), ending inventory and gross profit under:
(a). FIFO
(b). LIFO
2.
Assume the Breeze company uses perpetual inventory system, compute cost of goods sold
(COGS), ending inventory and gross profit under:
(a). FIFO
(b). LIFO
3.
Explain the reason of higher gross profit under FIFO than LIFO?
1.

Solution:
(1) If Breeze trading company uses periodic inventory method:
Ending inventory in units = Beginning inventory + Purchases Sales
= 600 units + 2,600 units 2,000 units
= 3,200 units 2,000 units
= 1,200 units
(a). Periodic-FIFO:
Ending inventory in dollars:
1000 units @ 6.50 each
200 units @ 6.00 each
Ending inventory under periodic-FIFO
Cost of goods sold (COGS):
600 units @ $5.00 each
1,400 units @ $6.00 each
Cost of goods sold (COGS) under periodic-FIFO
Gross profit (G.P)
Sales (400 12.00) + (1,000 12.50) + (600 13.50)
Less cost of goods sold (computed above)
Gross profit under periodic-FIFO

$6,500
$1,200
$7,700
$3,000
$8,400
$11,400
$25,400
$11,400
$14,000
-

(b). Periodic-LIFO
Ending inventory in dollars:
600 units @ $5.00 each
600 units @ $6.00 each
Ending inventory under periodic-LIFO
Cost of goods sold (COGS):
1,000 units @ $6.50 each
1,000 units @ $6.00 each
Cost of goods sold (COGS) under periodic-LIFO
Gross profit:
Sales (400 12.00) + (1,000 12.50) + (600 13.50)

$3,000
$3,600
$6,600
$6,500
$6,000
$12,500
$25,400

Cost of goods sold

$12,500
$12,900
-

Gross profit under periodic-LIFO

(2) If Breeze trading company uses perpetual inventory method:

(a). Perpetual-FIFO:
Date
Aug. 01
Aug. 10
Aug. 11

Purchases
Beginning inventory

400 $5.00 = $2,000

Balance
600 $5.00 = $3,000
200 $5.00 = $1,000
200 $5.00 = $1,000
1,600 $6.00 = $9,600

200 $5.00 = $1,000

800 $6.00 = $4,800
$5,800

800 $6.00 = $4,800

1,600 $6.00 = $9,600

Aug. 15
Aug. 20

Sales

1,000 $6.50 = $6,500

Aug. 27

600 $6.00 = $3,600

Ending inventory in dollars:

= $1,200 + $6,500
= $7,700
Cost of goods sold (COGS):
= $2,000 + $5,800 + $3,600
= $11,400
Gross profit:
Sales
Less cost of goods sold (COGS)
Gross profit

800 $6.00 = $4,800

1,000 $6.50 = $6,500
200 $6.00 = $1,200
1,000 $6.50 = $6,500

$25,400
$11,400
$14,000
-

(b). Perpetual-LIFO:
Date
Aug. 01
Aug. 10

Purchases
Beginning inventory

Aug. 11

1,600 $6.00 = $9,600

400 $5.00 = $2,000

Aug. 15
Aug. 20

1,000 $6.00 = $6,000

1,000 $6.50 = $6,500

Aug. 27
Ending inventory in dollars:
= $1,000 + $3,600 + $2,600
= $7,200
Cost of goods sold (COGS):
= $2,000 + $6,000 + $3,900
= $11,900
Gross profit:
Sales
Less cost of goods sold (COGS)
Gross profit

Sales

600 $6.50 = $3,900

Balance
600 $5.00 = $3,000
200 $5.00 = $1,000
200 $5.00 = $1,000
1,600 $6.00 = $9,600
200 $5.00 = $1,000
600 $6.00 = $3,600
200 $5.00 = $1,000
600 $6.00 = $3,600
1,000 $6.50 = $6,500
200 $5.00 = $1,000
600 $6.00 = $3,600
400 $6.50 = $2,600

$25,400
$11,900
$13,500
-

3. The reason of higher gross profit under FIFO than LIFO:

Under LIFO cost flow assumption, the most recent costs are matched against revenues, whereas
underFIFO cost flow assumption, the oldest costs are matched against revenues. In inflationary
environment (an economic situation where prices continuously rise), the FIFO produces higher gross
profit than LIFO. The reverse is true in a deflationary environment (an economic situation where prices
continuously decrease).
In this exercise, the prices are rising therefore, the FIFO produces higher gross profit than LIFO.