Question

Nu Company reported the following pretax data for its first year of operations. Net sales 2,950 Cost of goods available for sale 2,350 Operating expenses 710 Effective tax rate 20 % Ending inventories: If LIFO is elected 920 If FIFO is elected 1,150 What is Nu's gross profit ratio if it elects LIFO? (Round your answer to the nearest whole percentage.)

a. 59%.
b. 28%.
c. 52%.
d. 64%.

Answer 1

NU company.

The reason LIFO and FIFO present 2 different valuation of inventory is because of the way inventory is expensed in either methods.

LIFO stands for Last in First out. Meaning the last stock to be received should be the first to be issued to production.

If it thus shows that our costs of inventory has been increasing over the period, the inventory expensed to cost of sales will be high while the inventory balance in the balance sheet low. And the reverse if the costs of new inventory purchases have been declining.

FIFO stands for First in First out. Meaning the first inventories receives must be exhausted before we move to the receipt after that, and on and on.

If it thus shows that our costs of inventory has been increasing over the period, the inventory expensed to cost of sales will be low while the inventory balance in the balance sheet high. And the reverse if the costs of new inventory purchases have been declining

Nu company Gross Profit

Net sales $2,950

Less costs of sales:

Cost of goods available for sale 2,350

Less inventory closing 920

Costs of sales 1,430

Gross profit $1,520

Gross Profit % = $1,520 / $2,950

= 52% (c)