GB518 Unit 4 FIFO LIFO Inventory Costing Example

Reviewed by Chester Goodwin, MBA Financial Accounting Principles and Analysis Purdue University Global Free custom sample in 24 to 48h

This GB518 Unit 4 inventory costing problem costs a composite outdoor-gear retailer's year of backpack purchases under FIFO, LIFO and weighted average. Purdue Global GB 518, Financial Accounting Principles and Analysis, asks MBA students what a costing method does to reported margin. With unit costs rising from $42 to $54 and 2,450 backpacks sold for $232,750, cost of goods sold is $115,350 under FIFO, $121,350 under LIFO and $118,335 under weighted average, so gross margin ranges from 50.4 to 47.9 percent. Sections explain why a company chooses LIFO for taxes and how the reserve builds. Ridgeback's $0.9 million rise in its LIFO reserve then restates its margin to compare fairly with a FIFO rival.

CourseGB518 Financial Accounting Principles and Analysis
UnitUnit 4
Paper typeInventory costing problem
LengthAbout 850 words, 6 pages double-spaced
FormatAPA 7 student paper
SchoolPurdue University Global
ProgramMBA
UpdatedOctober 2026

Free sample paper for GB518 Unit 4

1

FIFO, LIFO, Average and a Rival's Margin: A Unit 4 Inventory Costing Problem for an Outdoor-Gear Retailer

[Student Name]

Purdue University Global

GB518: Financial Accounting Principles and Analysis

Unit 4 Inventory Costing Problem

[Instructor Name]

[Date]

The retailer, its competitor and every figure are composite and illustrative; the standards and sources cited are real.

What this part is doingShowing the margin range in the lead makes the point that method alone moves reported results.
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The Purchases and Sales

Ridgeback Outfitters sells hiking backpacks, among other lines. For the year, its backpack records show:

Beginning inventory: 400 units at $42.

February purchase: 600 units at $45.

May purchase: 800 units at $48.

August purchase: 700 units at $51.

November purchase: 500 units at $54.

Goods available for sale were 3,000 units costing $144,900. During the year, Ridgeback sold 2,450 backpacks at $95 each, for revenue of $232,750, leaving 550 units in ending inventory. The company uses a periodic system.

FIFO

First in, first out assigns the oldest costs to the units sold. Cost of goods sold is 400 units at $42, 600 at $45, 800 at $48 and 650 at $51: $16,800 plus $27,000 plus $38,400 plus $33,150, or $115,350. Ending inventory is 50 units at $51 and 500 at $54, or $29,550.

LIFO

Last in, first out assigns the newest costs to the units sold. Cost of goods sold is 500 units at $54, 700 at $51, 800 at $48 and 450 at $45: $27,000 plus $35,700 plus $38,400 plus $20,250, or $121,350. Ending inventory is 150 units at $45 and 400 at $42, or $23,550.

Weighted Average

The average unit cost for the period is $144,900 divided by 3,000 units, or $48.30, computed once under the periodic system. Cost of goods sold is 2,450 times $48.30, or $118,335. Ending inventory is 550 times $48.30, or $26,565.

Comparison

Revenue: $232,750 under every method.

Cost of goods sold: FIFO $115,350; LIFO $121,350; weighted average $118,335.

Gross margin: FIFO $117,400, or 50.4 percent; LIFO $111,400, or 47.9 percent; weighted average $114,415, or 49.2 percent.

Income tax at an assumed 25 percent on gross margin: FIFO $29,350; LIFO $27,850; weighted average $28,604.

Ending inventory: FIFO $29,550; LIFO $23,550; weighted average $26,565.

When costs rise, FIFO reports the highest margin and the highest inventory, because the cheaper old units flow into cost of goods sold while the expensive new units stay on the balance sheet. LIFO reports the lowest margin and the lowest tax, and its ending inventory reflects costs from years ago. Weighted average falls between them (Kieso et al., 2022).

The backpacks are identical under all three methods, yet gross margin differs by $6,000 and 2.5 points, purely because of which costs the method assigns to the units sold.

What this part is doingThe highlighted sentence states the comparison's lesson before the competitor restatement.
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Why a Company Would Choose LIFO

If LIFO reports lower profit, why would a retailer use it? The answer is tax. In a period of rising costs, LIFO's higher cost of goods sold lowers taxable income, so the company pays less tax now. In the backpack line alone, LIFO saves $1,500 of tax compared with FIFO in a single year. Robert Libby, Patricia Libby and Frank Hodge explain the LIFO conformity rule, under which a company that adopts LIFO on its tax return must also report under LIFO to shareholders (Libby et al., 2023), so the tax saving comes with lower reported earnings. Ridgeback's managers have accepted that trade.

The Balance Sheet Over Time

LIFO's effect builds up. Each year that costs rise, the LIFO reserve grows, and the inventory on Ridgeback's balance sheet drifts further below what it would cost to replace. After many years, LIFO inventory can reflect prices from a decade earlier. That makes ratios that use inventory, such as the current ratio and inventory turnover, harder to compare with a FIFO competitor unless the reserve is added back.

Comparing With a FIFO Rival

Ridgeback reports under LIFO for its whole business, which U.S. rules allow but international standards do not (Kieso et al., 2022). Its main competitor, Summit Trail Co., reports under FIFO, so their margins are not directly comparable.

Ridgeback's annual report shows revenue of $186 million and LIFO cost of goods sold of $112 million, a gross margin of 39.8 percent. Its notes disclose a LIFO reserve, the difference between inventory at FIFO and at LIFO, that rose from $3.9 million to $4.8 million during the year. Cost of goods sold under FIFO would have been lower by the increase in the reserve, $0.9 million, or $111.1 million. Restated on a FIFO basis, Ridgeback's gross margin is 40.3 percent.

Summit Trail reports a gross margin of 41.0 percent. Before restatement, Summit appeared 1.2 points ahead; on the same basis, the gap is 0.7 points. K. R. Subramanyam recommends exactly this adjustment when comparing firms that use different inventory methods (Subramanyam, 2014).

What this part is doingUsing the disclosed reserve to put both firms on one basis shows how an analyst makes a fair comparison.
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What a Manager Should Take From It

Neither method changes how many backpacks Ridgeback sold or what it paid for them. The choice changes reported margin, taxes and inventory value. A manager comparing stores, product lines or competitors should check which method each figure uses, and restate where necessary, before concluding that one is more profitable than another.

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References

Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2022). Intermediate accounting (18th ed.). Wiley.

Libby, R., Libby, P. A., & Hodge, F. (2023). Financial accounting (11th ed.). McGraw Hill.

Subramanyam, K. R. (2014). Financial statement analysis (11th ed.). McGraw-Hill Education.

GB518 Unit 4 instructions, in plain terms

In GB518 Unit 4 you cost inventory under several methods and explain what each does to reported results. Set out beginning inventory, purchases and sales for one product line. Work out the cost charged to sales and the inventory left on hand under FIFO, LIFO and weighted average, showing the layers or the average cost. Compare the methods in a table covering revenue, cost of goods sold, gross margin in dollars and percent, tax at an assumed rate and ending inventory. Explain why the methods diverge when costs rise, why a company might choose LIFO and how its effect builds over time. Then use a disclosed LIFO reserve to restate a company's figures on the same basis as a FIFO competitor and compare their margins. Cite accounting and analysis texts in APA 7.

How the GB 518 Unit 4 example is put together

The problem lists 400 backpacks at $42 and purchases of 600, 800, 700 and 500 at $45, $48, $51 and $54, with 2,450 sold at $95. FIFO layers give $115,350 of cost and $29,550 of ending inventory, LIFO layers give $121,350 and $23,550, and the $48.30 average gives $118,335 and $26,565. A comparison shows margins of 50.4, 47.9 and 49.2 percent and taxes of $29,350, $27,850 and $28,604, with Kieso, Weygandt and Warfield on rising costs; the highlighted sentence states the $6,000 gap. A section explains LIFO's tax saving and the conformity rule, citing Libby, Libby and Hodge, and another the reserve's buildup. Ridgeback's $186 million of revenue and $112 million of LIFO cost are restated using a reserve rising from $3.9 million to $4.8 million, narrowing the gap with Summit Trail to 0.7 points, as Subramanyam recommends.

Reading the GB518 Unit 4 grading rubric

GB518 rubric credit for this problem rests on accurate layers and a clear explanation of what the method changes. The cost charged to sales and the stock remaining should be right under every method, with layers shown. A comparison table that includes margin, tax and inventory earns credit. Explaining why FIFO and LIFO diverge when costs rise shows conceptual understanding. Discussing LIFO's tax motive and its long-run balance sheet effect shows depth. The competitor restatement carries significant weight, because using a disclosed LIFO reserve to compare firms on one basis is what analysts do. Citations in APA 7 come from the Kieso text on methods, the Libby text on LIFO conformity and Subramanyam on restating for comparison.

Common GB518 Unit 4 mistakes, and how to avoid them

Many GB518 Unit 4 problems compute three methods correctly and stop without saying which reported margin a reader should trust. Others compare a LIFO company with a FIFO company directly. A frequent gap is the reserve: the LIFO reserve disclosed in the notes is what makes a fair comparison possible, and its change, not its balance, adjusts cost of goods sold. Some writers forget that method choice affects tax. Lay out the layers, compute each method, compare margin, tax and inventory, explain the divergence and the LIFO motive, and restate with the reserve before comparing firms.

Get a GB518 Unit 4 example written to your instructions

Send the purchase and sales data your GB518 Unit 4 prompt provides, with its instructions and rubric. A custom inventory costing problem comes back in 24 to 48 hours, computed under the methods your section names and read for their effect on margin and tax. The first one is free, whichever methods are required. The paper above is an original model document written by our desk, not a submitted student paper and not an official Purdue University Global document.

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GB518 Unit 4 questions, answered

Does the choice of inventory method change a company's actual profitability?

It changes reported profit, not the underlying business. The goods bought and sold are the same under every method; only the order in which costs are assigned differs. The one real cash effect comes through income tax. That distinction is what graduate prompts in GB518 usually want stated, and it is why analysts adjust for method before comparing companies.

What is a LIFO reserve and where does it come from?

It is the difference between inventory valued under FIFO and under LIFO, which US companies using LIFO disclose in their notes. Adding the reserve to LIFO inventory approximates FIFO inventory, and the change in the reserve adjusts cost of goods sold. It is the standard tool for comparing a LIFO firm with one that reports under FIFO.

Does the problem need a perpetual or periodic system?

Whichever the prompt specifies, since the two can give different results under LIFO and average cost. Many GB518 problems use periodic for simplicity, but some provide dated sales to test the perpetual version. The retailer problem names its system in the first line of each section, which prevents a grader from assuming the wrong one.

Where can I find a free GB518 Unit 4 sample paper?

This page carries a full GB518 Unit 4 inventory costing problem for an outdoor-gear retailer, with FIFO, LIFO and weighted average, a comparison table, a LIFO reserve restatement and APA 7 references.

How does the LIFO reserve allow a fair comparison?

The reserve is the gap between inventory at FIFO and at LIFO. Its increase during the year is the extra cost LIFO charged, so subtracting it from LIFO cost of goods sold restates the margin as FIFO would have reported it.