Sun Care Company uses a perpetual inventory system. The following information is provided for cost of goods sold and ending inventory under FIFO and weighted average.
______________________ FIFO ________ Weighted Average
Cost of goods sold ...... $8,060 .................. $7,787
ending inventory ......... $1,375 ................. $1,648
Instructions
(a) Assuming 1,180 units are sold for $15 per unit, and the product costs are decreasing, calculate gross profit under (1) FIFO and (2) weighted average. Comment on why gross profit is not the same under the two cost formulas.
(b) What impact, if any, does the choice of cost formula have on cash flow? Explain.