Question - Learning Objective: Measuring gross profit-FIFO vs. LIFO; Falling prices
Suppose a Waldorf store in Atlanta, Georgia, ended November 2010 with 900,000 units of merchandise that cost an average of $5 each. Suppose the store then sold 800,000 units for $4.8 million during December. Further, assume the store made two large purchases during December as follows:
Dec 11 - 200,000 units @ $4.00 = $800,000
Dec 24 - 500,000 units @ $3.00 = $1,500,000
Requirements
1. At December 31, the store manager needs to know the store's gross profit under both FIFO and LIFO. Supply this information.
2. What caused the FIFO and LIFO gross profit figures to differ?
3. Assume that the store uses FIFO to value inventories, and that the store manager, whose bonus is based on profits, decides to change the unit cost on inventory to $5 for all units. What impact will this have on gross profit and net income? Does GAAP allow this?