P6-7B The management of Clare Co. asks your help in determining the comparative effects of the FIFO and LIFO inventory cost flow methods. For 2011, the accounting records show the following data.
Inventory, January 1 (10,000 units) $ 45,000
Cost of 100,000 units purchased 532,000
Selling price of 80,000 units sold 700,000
Operating expenses 140,000
Units purchased consisted of 35,000 units at $5.10 on May 10; 35,000 units at $5.30 on August 15; and 30,000 units at $5.60 on November 20. Income taxes are 30%.
Instructions
(a) Prepare comparative condensed income statements for 2011 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 amount for the balance sheet? Why?
(2) Which inventory cost flow method produces the most meaningful 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?
Click here for the solution: The management of Clare Co. asks your help in determining the comparative effects of the FIFO and LIFO inventory cost flow methods
Showing posts with label FIFO. Show all posts
Showing posts with label FIFO. Show all posts
Monday, August 17, 2015
Saturday, August 15, 2015
Harrisburg Company is considering changing its inventory valuation method from FIFO to LIFO because of the potential tax savings
CA8-10 (FIFO and LIFO) Harrisburg Company is considering changing its inventory valuation method from FIFO to LIFO because of the potential tax savings. However, the management wishes to consider all of the effects on the company, including its reported performance, before making the final decision.
The inventory account, currently valued on the FIFO basis, consists of 1,000,000 units at $8 per unit on January 1, 2010. There are 1,000,000 shares of common stock outstanding as of January 1, 2010, and the cash balance is $400,000.
The company has made the following forecasts for the period 2010–2012.
Instructions
(a) Prepare a schedule that illustrates and compares the following data for Harrisburg Company under the FIFO and the LIFO inventory method for 2010–2012. Assume the company would begin LIFO at the beginning of 2010.
1. Year-end inventory balances.
2. Annual net income after taxes.
3. Earnings per share.
4. Cash balance.
Assume all sales are collected in the year of sale and all purchases, operating expenses, and taxes are paid during the year incurred.
(b) Using the data above, your answer to (a), and any additional issues you believe need to be considered, prepare a report that recommends whether or not Harrisburg Company should change to the LIFO inventory method. Support your conclusions with appropriate arguments.
Click here for the solution: Harrisburg Company is considering changing its inventory valuation method from FIFO to LIFO because of the potential tax savings
The inventory account, currently valued on the FIFO basis, consists of 1,000,000 units at $8 per unit on January 1, 2010. There are 1,000,000 shares of common stock outstanding as of January 1, 2010, and the cash balance is $400,000.
The company has made the following forecasts for the period 2010–2012.
Instructions
(a) Prepare a schedule that illustrates and compares the following data for Harrisburg Company under the FIFO and the LIFO inventory method for 2010–2012. Assume the company would begin LIFO at the beginning of 2010.
1. Year-end inventory balances.
2. Annual net income after taxes.
3. Earnings per share.
4. Cash balance.
Assume all sales are collected in the year of sale and all purchases, operating expenses, and taxes are paid during the year incurred.
(b) Using the data above, your answer to (a), and any additional issues you believe need to be considered, prepare a report that recommends whether or not Harrisburg Company should change to the LIFO inventory method. Support your conclusions with appropriate arguments.
Click here for the solution: Harrisburg Company is considering changing its inventory valuation method from FIFO to LIFO because of the potential tax savings
Sunday, July 12, 2015
The management of Utley Inc. asks your help in determining the comparative effects of the FIFO and LIFO inventory cost flow methods
P6-7A The management of Utley Inc. asks your help in determining the comparative effects of the FIFO and LIFO inventory cost flow methods. For 2008 the accounting records show these data.
Inventory, January 1 (10,000 Units) $35,000
Cost of 120,000 units purchased 504,500
Selling price of 100,000 units sold 665,000
Operating expenses 130,000
Units purchased consisted of 35,000 units at $4.00 on May 10; 60,000 units at $4.20 on August 15; and 25,000 units at $4.50 on November 20. Income taxes are 28%.
Instructions:
a. Prepare comparative condensed income statements for 2008 under FIFO and LIFO (show computations of ending inventory.)
b. Answer the following questions for management in the form of a business letter.
1. Which inventory cost flow method produces the most meaningful inventory amount for the balance sheet? Why?
2. Which inventory cost flow method produces the most meaningful net income? Why?
3. Which inventory cost flow method is most likely to approximate the actual physical flow of the goods? Why?
4. How much more cash will be available for management under LIFO than under FIFO? Why?
5. How much of the gross profit under FIFO is illusionary in comparison with the gross profit under LIFO?
Click here for the solution: The management of Utley Inc. asks your help in determining the comparative effects of the FIFO and LIFO inventory cost flow methods
Inventory, January 1 (10,000 Units) $35,000
Cost of 120,000 units purchased 504,500
Selling price of 100,000 units sold 665,000
Operating expenses 130,000
Units purchased consisted of 35,000 units at $4.00 on May 10; 60,000 units at $4.20 on August 15; and 25,000 units at $4.50 on November 20. Income taxes are 28%.
Instructions:
a. Prepare comparative condensed income statements for 2008 under FIFO and LIFO (show computations of ending inventory.)
b. Answer the following questions for management in the form of a business letter.
1. Which inventory cost flow method produces the most meaningful inventory amount for the balance sheet? Why?
2. Which inventory cost flow method produces the most meaningful net income? Why?
3. Which inventory cost flow method is most likely to approximate the actual physical flow of the goods? Why?
4. How much more cash will be available for management under LIFO than under FIFO? Why?
5. How much of the gross profit under FIFO is illusionary in comparison with the gross profit under LIFO?
Click here for the solution: The management of Utley Inc. asks your help in determining the comparative effects of the FIFO and LIFO inventory cost flow methods
Thursday, July 2, 2015
State how each of the following items is reflected in the financial statements
State how each of the following items is reflected in the financial statements.
1.Change from FIFO to LIFO method for inventory valuation purposes.
2.Charge for failure to record depreciation in a previous period.
3.Litigation won in current year, related to prior period.
4.Change in the realizability of certain receivables.
5.Writeoff of receivables.
6.Change from the percentage-of-completion to the completed-contract method for reporting net income.
Click here for the solution: State how each of the following items is reflected in the financial statements
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