230 Pairs of One Running Shoe at Four Prices: FIFO, LIFO and Weighted Average Compared, Perpetual Entries Shown and Three Missing Pairs Traced to the Controls That Should Catch Them
[Student Name]
University of Phoenix
ACC/290: Principles of Accounting I
Week 4 Assignment
[Instructor Name]
[Date]
The store and all figures are a composite written for a model paper.
A composite independent running store sells shoes, apparel and accessories and uses a perpetual inventory system, updating inventory with every purchase and sale. Its best-selling shoe is one neutral trainer from a major brand. Over one quarter, the brand raised wholesale prices twice, so the store bought the same shoe at four different costs. The store sold 180 pairs at the same retail price all quarter, yet its gross profit on those sales depends on which cost assumption its accountant chooses. This paper records the quarter, compares inventory methods and examines the store's controls.
Merchandising Operations
A merchandiser earns revenue by selling goods it buys, so its income statement includes cost of goods sold and gross profit, the difference between sales and the cost of the goods sold (Weygandt et al., 2021). In a perpetual system, each purchase increases the Inventory account, and each sale requires two entries: one recording the sale and one moving the cost of the goods sold from Inventory to Cost of Goods Sold.
For example, a pair sold for $130 on a credit card is recorded as a debit to Cash of $130 and a credit to Sales Revenue of $130, with a second entry debiting Cost of Goods Sold and crediting Inventory for the pair's cost. The cost to use depends on the inventory method.
The Quarter's Purchases and Sales
The store began the quarter with 40 pairs costing $62 each, or $2,480. It bought 60 pairs at $65 on April 5, or $3,900; 80 pairs at $68 on May 10, or $5,440; and 50 pairs at $71 on June 15, or $3,550. Goods available for sale totaled 230 pairs costing $15,370. The store sold 180 pairs at $130, for sales of $23,400, leaving 50 pairs in the records at the end of the quarter.
For simplicity, the calculations below apply each method to the quarter as a whole; a perpetual system applying the methods sale by sale would produce slightly different results for LIFO and average cost.
Three Methods
First-in, first-out
FIFO assumes the oldest units are sold first. Ending inventory is the 50 most recent pairs at $71, or $3,550. Cost of goods sold is $15,370 minus $3,550, or $11,820. Gross profit is $23,400 minus $11,820, or $11,580.
Last-in, first-out
LIFO assumes the newest units are sold first. Ending inventory is the oldest units: 40 pairs at $62 and 10 at $65, or $3,130. Cost of goods sold is $12,240. Gross profit is $11,160.
Weighted average
The average cost is $15,370 divided by 230 pairs, about $66.83. Ending inventory is 50 pairs at that cost, about $3,341. Cost of goods sold is about $12,029, and gross profit is about $11,371.
Why the Results Differ
With costs rising from $62 to $71, FIFO assigns the lower, older costs to cost of goods sold, producing the highest gross profit, $11,580, and the highest ending inventory. LIFO assigns the higher, newer costs to cost of goods sold, producing the lowest gross profit, $11,160. Weighted average falls between them. The difference between FIFO and LIFO gross profit is $420 on one shoe in one quarter. At a combined tax rate of 25%, LIFO would reduce taxes by about $105 for this shoe alone; across the store's inventory in a year of rising prices, the difference would be much larger.
The methods also affect the balance sheet. FIFO's ending inventory, $3,550, is close to what it would cost to replace the shoes today. LIFO's, $3,130, reflects older costs and understates the inventory's current value.
Choosing a Method
U.S. rules allow all three methods, but a company must apply its choice consistently, and a business using LIFO for taxes must also use it for financial reporting. International standards do not permit LIFO. For a small retailer with rising costs and no plans to report under international standards, LIFO lowers taxes but reports lower profit to its bank. The store's owner chose FIFO because its reported profit and inventory values better match the shoes' current costs and because its lender reviews the balance sheet closely.
Three Missing Pairs
At the end of the quarter, a physical count found 47 pairs, not the 50 in the records. The three missing pairs, at FIFO cost of $71 each, represent shrinkage of $213. The store records it by debiting Cost of Goods Sold and crediting Inventory for $213, which reduces gross profit to $11,367. Across the retail industry, shrink, from shoplifting, employee theft, errors and vendor fraud, has been estimated at about 1.6% of sales (National Retail Federation, 2023).
Internal Controls
Internal controls protect assets and ensure accurate records. The Association of Certified Fraud Examiners (ACFE, 2024) found that a lack of internal controls was the weakness most often cited in the frauds it studied, followed by the override of existing controls. The store reviewed its inventory controls and adopted five changes.
Segregation of duties: the employee who receives shipments no longer updates inventory records; the manager checks each delivery against the purchase order and packing slip.
Cycle counts: instead of counting everything once a quarter, staff count the 30 highest-value items weekly, so discrepancies are found quickly.
Physical controls: shoes on display are single samples, with stock kept in a back room open only to staff.
Exception reports: the point-of-sale system reports voided sales, returns without receipts and large discounts daily for the manager's review.
Reconciliation: shrinkage by product is tracked monthly, so patterns can be investigated.
Conclusion
The same 180 pairs of shoes produced gross profit ranging from $11,160 to $11,580 depending on the inventory method, because rising costs make the cost assumption matter. FIFO, LIFO and weighted average each have consequences for profit, taxes and the balance sheet. The inventory figures are reliable only if the count behind them is, which is why internal controls over receiving, storage, counting and sales belong in the same discussion as the costing method.
References
Association of Certified Fraud Examiners. (2024). Occupational fraud 2024: A report to the nations.
National Retail Federation. (2023). National retail security survey 2023.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2021). Accounting principles (14th ed.). Wiley.
How this ACC 290 Week 4 example is structured
The ACC/290 shelf page describes Week 4 as covering merchandising operations, inventory methods and internal control. The paper follows one product through a quarter so every method uses the same facts, which isolates the effect of the method itself. It then treats inventory control as part of the same topic, because the numbers the methods produce are only as good as the count behind them. Students search this week as ACC 290 Week 4, ACC290 Wk 4 or ACC/290 Wk 4; all three are the same assignment.
ACC/290 Week 4 questions, answered
What does ACC/290 Week 4 usually ask for?
The ACC/290 shelf describes Week 4 as covering merchandising operations, inventory costing methods and internal control. Many sections assign problems computing cost of goods sold and ending inventory under FIFO, LIFO and average cost, recording merchandising transactions and explaining internal controls.
Why do FIFO and LIFO give different results?
When costs change, the methods assign different costs to the units sold. In a period of rising costs, FIFO assigns the older, lower costs to cost of goods sold, producing higher profit and a higher ending inventory, while LIFO assigns the newer, higher costs, producing lower profit and lower taxes.
What is inventory shrinkage?
The difference between the inventory recorded in the accounting system and the inventory actually on hand, caused by theft, damage, errors in receiving or recording and vendor fraud. It is found by physical counts and recorded as an increase in cost of goods sold.
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