 # FIFO LIFO Gross Profit

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?)

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.

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