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MVP Corp uses LIFO to value its inventory

MVP Corp uses LIFO to value its inventory. The 20x8 inventory records disclose the following:

Beginning Inventory: Units Unit Cost

First layer 10,000 $15

Second layer 22,000 18

Purchases 250,000 20

At December 26, 20x8, the company had a special, nonrecurring opportunity to purchase 40,000 units at $17 per unit. The purchase can be made and the units delivered on December 30, or it can be delayed until the first week of January 20x9. The company plans to make the purchase, due to the obvious cost savings involved. Sales for 20x8 totaled 245,000 units.

Describe the financial statement effects of making the purchase in 20x8 as opposed to 20x9. Argue for making the purchase during 20x8. Defend the use of LIFO. Use the matching concept in your defense.

Solution Preview

If the purchase is made in 2008, it will increase inventory (current assets) by $680,000, but it will also increase the same offsetting account, which would be accounts payable, by $680,000. This is going to therefore also increase current liabilities by 680,000, which is a sizable amount. This will decrease the company's liquidity ratios, and increase their debt ratios, until the accounts payable is paid off. Showing this large transaction at the very end of the year is not a particularly good idea, because the balance sheet is gravely affected. The main reason why most companies would push this purchase to after the 1st of the year is so that there would be time to pay down the A/P before they have to release their next financial ...

$2.19