Ex. 175
London Co. uses a periodic inventory system. Its records show the following for the month of May, in which 75 units were sold.
UnitsUnit CostTotal Cost
May 1 Inventory35$ 8$ 280
15 Purchases3011330
24 Purchases 4012 480
Totals105$1,090
Instructions
Compute the ending inventory at May 31 and cost of goods sold using the FIFO and LIFO methods. Prove the amount allocated to cost of goods sold under each method.
Ex. 176
Wilco Company reports the following for the month of June.
UnitsUnit CostTotal Cost
June 1 Inventory300$5$1,500
12 Purchase45062,700
23 Purchase75075,250
30 Inventory180
Instructions
(a)Compute the cost of the ending inventory and the cost of goods sold under (1) FIFO and (2) LIFO.
(b)Compute the cost of the ending inventory and the cost of goods sold using the average-cost method.
Ex. 177
Purdy Company is in the electronics industry and the price it pays for inventory is decreasing.
Instructions
Indicate which inventory method will:
a.provide the highest ending inventory.
b.provide the highest cost of goods sold.
c.result in the highest net income.
d.result in the lowest income tax expense.
e.produce the most stable earnings over several years.
Ex. 178
Eckert Company reported the following summarized annual data at the end of 2011:
Sales revenue$1,000,000
Cost of goods sold* 600,000
Gross margin400,000
Operating expenses 250,000
Income before income taxes$ 150,000
*Based on an ending FIFO inventory of $250,000.
The income tax rate is 30%. The controller of the company is considering a switch from FIFO to LIFO. He has determined that on a LIFO basis, the ending inventory would have been $220,000.
Instructions
(a)Restate the summary information on a LIFO basis.
(b)What effect, if any, would the proposed change have on EcKert's income tax expense, net income, and cash flows?
(c)If you were an owner of this business, what would your reaction be to this proposed change?
Ex. 179
Compute the lower-of-cost-or-market valuation for Aber Company's total inventory based on the following:
Inventory CategoriesCost DataMarket Data
A$18,000$17,200
B 14,000 14,600
C 21,000 20,500