FIFO LIFO Gross Profit

CFA Level I FRA
#1

Units Unit Price

Beginning Inventory 709 $2.00

Purchases 556 $6.00

Sales 959 $13.00

What is gross profit using the FIFO method and LIFO method?

Explanation

FIFO COGS = (709 units)($2/unit) + (959 − 709)($6/unit) = $1,418 + $1,500 = $2,918

Sales = (959 units)($13/unit) = $12,467

Gross profit = Sales − COGS

= 12,467 − 2,918 = $9,549

LIFO COGS = (556 units)($6/unit) + (959 − 556)($2/unit) = $3,336 + $806 = $4,142

Sales = (959 units)($13/unit) = $12,467

Gross profit = Sales − COGS

= 12,467 − 4,142 = $8,325

My question: Where did they get “(959 − 709)($6/unit)” for FIFO COGS? And “(959 − 556)($2/unit)” for LIFO COGS? (specifically the price per unit part. Shouldn’t it be $2 and $6 for FIFO and LIFO?)

#2

FIFO: 709 units sold from beginning inventory (all of BE), 250 (= 959 − 709) units sold from purchases.

LIFO: 556 units sold from purchases (all of purchases),403 (= 959 − 556) units sold from beginning inventory.

#3

Total Inventory (Units) =Beginning Inventory (709) + Additional Purchases (556 ) = 1,265 Units

Inventory Sold during period = 959 Units

So, as per FIFO calculation, old inventory will be sold first (i.e. 709 Units for $2 each = $1,418) and remaining quantity will be sold from current period’s purchases (i.e., total sales 959- already sold 709 =remaining 250 Units) * $6 each = $1,500

Hence, total COS while using FIFO valuation method = $1,418 + $1,500 = $2,918

or FIFO COGS = (709 units)($2/unit) + (959 − 709)($6/unit) = $1,418 + $1,500 = $2,918

Ending FIFO Inventory (B/S value) = 1,265 Units - 959 Units = 306 Units * $6 each = $1,836