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A study on Inventory Methods

Electronic Heaven, Inc., sells electronic merchandise, including a personal computer offered for the first time in September, which retails for $695. Sales of this personal computer for the next six month period (ending February 28) totaled $52, 125. Purchase records indicate the following on the amounts purchased and prices and prices paid by Electronic Heaven:

Purchase Date Units Cost per unit
September 10 12 $370
October 15 20 $375
November 2 32 $360
December 10 11 $350
February 3 10 $335

Required:

a. Prepare a statement for this personal computer showing its gross margin for the six month period ending February 28 using the FIFO, average cost, and LIFO inventory methods.

b. What was the gross margin percentage earned on the $52, 125 sales of this personal computer? (Hint: the answer depends on the inventory method used.)

c. If all of the purchases and sales of this personal computer were for cash, what was the net pre-tax cash flow resulting from the purchases and sales of this personal computer? Would the use of different inventory methods change the pre-tax cash flow figure you calculated?

d. Assume a tax rate of 30 percent. What would be the net after-tax cash flow using different inventory methods for tax purposes?

Solution Preview

For your convenience, I have attached a formatted MS Excel file containing the information posted below. I have also included notes and reference sources, which might prove useful in gaining a better understanding of the material covered in this exercise.

INVENTORY METHODS

Total computers sold = Total Sales / Retail Price Per Computer
Total computers sold = $52,125 / $695
Total computers sold = 75

FIFO METHOD

Purchase Date Units Cost Per Unit Cost of Goods Total
September 10 12 $370 12 Computers @ $370 each $4,440
October 15 20 $375 20 Computers @ $375 each $7,500
November 2 32 $360 32 Computers @ $360 each $11,520
December 10 11 $350 11 Computers @ $350 each $3,850
February 3 10 $335 0 Computers @ $335 each $0
Cost of Goods (75 Computers) = $27,310

LIFO METHOD

Purchase Date Units Cost Per Unit Cost of Goods Total
September 10 12 $370 2 Computers @ $370 each $740
October 15 20 $375 20 Computers @ $375 each $7,500
November 2 32 $360 32 Computers @ $360 each $11,520
December 10 11 $350 11 Computers @ $350 ...

Solution Summary

File contains a formatted MS Excel file containing examples of the LIFO , FIFO , and Average Cost inventory methods

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