Three identical units of merchandise were purchased during may, as follows: magnesium xp units cost mar. 3 purchase 1 $130 10 purchase 1 136 19 purchase 1 142 total 3 $408 assume that two units are sold on may 23 for $313 total. determine the gross profit for may and ending inventory on may 31 using (a) fifo, (b) lifo, and (c) average cost methods.

a) FIFO (Gross Profit - $47, Ending Inventory - 1 unit, Ending inventory cost = $142)

b) LIFO (Gross Profit - $35, Ending Inventory - 1 unit, Ending inventory cost = $130)

b) Average cost (Gross Profit - $41, Ending Inventory - 1 unit, Ending inventory cost = $136)

Explanation:

A) FIFO

In FIFO method, the items are sold which the company acquires first. In that case, the company purchased 3 items. Then the company sold 2 items. Therefore, first 2 items will be sold. In that case,

Sales (under FIFO) (2 units)         $313

Less: Cost of goods sold:

Mar 3                       $130

Mar 10                      $136             $(266)

Gross Profit                                     $47

Ending Inventory = Beginning + Purchase - Sale

Ending Inventory = (0 + 3 - 2) units = 1 unit

Cost of ending inventory = $142 (As it is FIFO system, first items are sold means the last item will be the ending inventory cost).

B) LIFO

In LIFO method, the items are sold which the company acquires last. In that case, the company purchased 3 items. Then the company sold 2 items. Therefore, last 2 items will be sold. In that case,

Sales (under LIFO) (2 units)         $313

Less: Cost of goods sold:

Mar 19                      $142

Mar 10                      $136             $(278)

Gross Profit                                     $35

Ending Inventory = Beginning + Purchase - Sale

Ending Inventory = (0 + 3 - 2) units = 1 unit

Cost of ending inventory = $130 (As it is LIFO system, last items are sold means the first item will be the ending inventory cost).

C) Average cost method

In average cost method, the items are sold after the company add the total units and costs then divide the total costs by the total units. In that case, the company purchased 3 items. Total cost of those three items = $(130 + 136 + 142) = $408. The average cost is = $408/3 = $136. Therefore, as the company has sold 2 items,

the cost of goods sold is = The average cost x selling units

the cost of goods sold is = $136 x 2 = $272.

In that case,

Sales (under Average cost) (2 units)         $313

Less: Cost of goods sold:                        $(272)

Gross Profit                                                 $41

Ending Inventory = Beginning + Purchase - Sale

Ending Inventory = (0 + 3 - 2) units = 1 unit

Cost of ending inventory = $136*1 = $136 (As it is average cost system, the average cost is multiplied by the number of ending inventory to get the ending inventory cost).

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