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Financial Accounting : LIFO and FIFO - Application Problem

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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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Solution Summary

Inventory cost data is used to compare inventory cost flow methods. The solution is detailed.

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