Phantom Profit: FIFO and LIFO
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please help me with the following problem. I don't understand phantom profit.
In its first month of operation, Maze Company purchased 100 units of inventory for $6, then 200 units for $7, and finally 150 units for $8. At the end of the month, 180 units remained. Compute the amount of phantom profit that would result if the company used FIFO rather than LIFO. Explain why this amount is referred to as phantom profit. The company uses the periodic method.
Hint: Explain the financial statement effect of inventory cost flow assumptions.
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Solution Summary
This solution computes the amount of phantom profit that an organization would have if they used the FIFO rather than the LIFO system. Additionally, this solution explains where this phantom profit comes from.
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Cost of inventory
100*6 = $600
200*7 = $1400
150*8 = $1200
Total inventory
450 Units at $3200
Units sold = 270 units
Remaining inventory = 180 units
Cost of goods sold under FIFO
100*6 = $600
170*7 = $1190
Total = $1790
Cost of goods sold under ...
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