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Financial Accounting : FIFO and LIFO Applied

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P6-4A The management of Aurora Co. is reevaluating the appropriateness of using its present inventory cost flow
method, which is average cost. They request your help in determining the results of operations for 2002 if either the FIFO
method or the LIFO method had been used. For 2002, the accounting records show the following data.

Inventories Purchases and Sales
Beginning (15,000 units) 34,000 Total net sales (225,000 units) $865,000
Ending (20,000 units) Total cost of goods purchased
(230,000 units) $591,500

Purchases were made quarterly as follows.

Quarter Units Unit Cost Total Cost
1 60,000 $2.40 $144,000
2 50,000 2.5 125,000
3 50,000 2.6 130,000
4 70,000 2.75 192,500
230,000 $591,500

Operating expenses were $147,000 and the company's income tax rate is 32%

Instructions
(a) Prepare comparative condensed income statements for 2002 under FIFO and LIFO. (Show computations of ending
inventory.)

(b) Answer the following questions for management.

(1) Which cost flow method (FIFO or LIFO) produces the more meaningful inventory amount for the balance sheet? Why?
(2) Which cost flow method (FIFO or LIFO) produces the more meaningful net income? Why?
(3) Which cost flow method (FIFO or LIFO) is more likely to approximate actual physical flow of the goods? Why?
(4) How much additional cash will be available for management under LIFO than under FIFO? Why?
(5) Will gross profit under the average cost method be higher or lower than (a) FIFO and (b) LIFO?
(Note: It is not necessary to quantify your answer.)

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Solution Summary

Purchase data is analyzed as it applies to cost flow methods (FIFO and LIFO). The solution is detailed.

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See Also This Related BrainMass Solution

Financial Accounting : LIFO and FIFO - Application Problem

The management of Congo Co. asks your help in determining the comparative effects of the FIFO and LIFO inventory cost flow methods. For 2002, the accounting records show the following data.

Inventory, January 1 (10,000 units) $35,000
Cost of 110,000 units purchased 478,000
Selling price of 95,000 units sold 665,000
Operating expenses 120,000
Units purchased consisted of 40,000 units at $4.20 on May 10; 50,000 units at $4.40 on August 15; and 20,000 units at $4.50 on November 20. Income taxes are 28%.

Instructions:
a) Prepare comparative condensed income statements for 2002 under FIFO and LIFO. (Show computations of ending inventory)
b) Answer the following questions for management.
(1) Which inventory cost flow method produces the most meaningful inventory amounts for the balance sheet? Why?
(2) Which inventory cost flow method produces the most meaningul net income? Why?
(3) Which inventory cost flow method is most likely to approximate actual physical flow of the goods? Why?
(4) How much additional cash will be available for management under LIFO than under FIFO? Why?
(5) How much of the gross profit under FIFO is illusory in comparison with the gross profit under LIFO?

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