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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%

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

(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.