Financial Statement Effects of FIFO and LIFO the management of Tritt Company has asked its accounting department to describe the effect upon the company?s financial position and its income statements of accounting for inventories on the LIFO rather than the FIFO basis during 2010 and 2011. The accounting department is to assume that the change to LIFO would have been effective on January 1, 2010, and that the initial LIFO base would have been the inventory value on December 31, 2009. Presented below are the company?s financial statements and other data for the years 2010 and 2011 when the FIFO method was employed. Other data:

1. Inventory on hand at December 31, 2009, consisted of 40,000 units valued at $3.00 each.

2. Sales (all units sold at the same price in a given year):

2010?150,000 units @ $6.00 each 2011?180,000 units @ $7.50 each

3. Purchases (all units purchased at the same price in given year):

2010?150,000 units @ $3.50 each 2011?180,000 units @ $4.40 each

4. Income taxes at the effective rate of 40% are paid on December 31 each year. Name the account(s) presented in the financial statements that would have different amounts for 2011 if LIFO rather than FIFO had been used, and state the new amount for each account that is named. Show computations.

(CMA adapted)

Transcribed Image Text:

Financial Position as of 12/31/10 12/31/09 12/31/11 $ 90,000 80,000 120,000 160,000 $450,000 $ 40,000 70,000 200,000 $ 154,000 $130,000 100,000 140,000 Cash Accounts receivable 120,000 Inventory 176,000 170,000 $540,000 $ 60,000 200,000 $ 650,000 $ 80,000 Other assets Total assets Accounts payable Other liabilities 80,000 200,000 110,000 200,000 Common stock 200,000 $540,000 260,000 $ 650,000 Retained earnings 140,000 $450,000 Total liabilities and equity Income for Years Ended 12/31/11 12/31/10 $900,000 $1,350,000 Sales Less: Cost of goods sold Other expenses 505,000 756,000 205,000 304,000 710.000 1,060.000 Income before income taxes 190,000 290,000 116.000 Income taxes (40%) 76,000 $ 174,000 Net income $114,000