Company L and Company F are identical in all respects except that Company L uses the LIFO method and Company F uses the FIFO method. Each company has been in business for five years and maintains a base inventory of 2,000 units each year. Each year, except the first year, the number of units purchased equaled the number of units sold. Over the five year period, unit sales increased 10 percent each year and the unit purchase and selling prices increased at the beginning of each year to reflect inflation of 4 percent per year. In the first year, 20,000 units were sold at a price of $15.00 per unit and the unit purchase price was $8.00.
1. What was the end of year inventory, sales, cost of sales, and gross profit for each company for each of the five years?
2. Compare the inventory turnover ratios (based on ending inventory carrying amounts) and gross profit margins over the five year period and between companies.
Note that if the company sold more units than it purchased in a year, inventory would decrease. This is referred to as LIFO liquidation. The cost of sales of the units sold in excess of those purchased would reflect the inventory carrying amount. In this example, each unit sold in excess of those purchased would have a cost of sales of $8 and a higher gross profit.