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In its first month of operation, Ivanhoe Company purchased 320 units of inventory for $5, then 420 units for $6, and finally 360 units for $7. At the end of the month, 400 units remained. The company uses the periodic method. Compute the amount of phantom profit that would result if the company use FIFO rather than LIFO.

Answer :

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Answer:

If the company uses FIFO method, the cost of goods sold is lower increasing the gross profit. In this case, income will increase by $680.

Explanation:

Giving the following information:

purchases:

320 units of inventory for $5

420 units for $6

360 units for $7

At the end of the month, 400 units remained.

First, we need to determine the number of units sold:

Units sold= total units - ending inventory

Units sold= 1,100 - 400= 700

Now, we calculate the cost of goods sold using LIFO (last-in, first-out) and FIFO (first-in, first-out)

LIFO:

COGS= 360*7 + 340*6= $4,560

FIFO:

COGS= 320*5 + 380*6= $3,880

Finally, the difference:

Difference= 4,560 - 3,880= $680

If the company uses FIFO method, the cost of goods sold is lower increasing the gross profit. In this case, income will increase by $680.

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