The management of Caradeo is reevaluating the appropriateness of using its pres- | Compute ending inventory, ent inventory cost flow method, which is average cost. The company requests your help Prepare income statements, in determining the results of operations for 2007 if either the FIFO or the LIFO method and answer questions using had been used. For 2007 the accounting records show these data: is ms . oe BLL Inventories Purchases and Sales -

Beginning (10,000 units) $22,800 Total net sales (222,000 units) $862,000 GEE Ending (18,000 units) Total cost of goods purchased

(230,000 units) 571,000 Purchases were made quarterly as follows.

Quarter Units Unit Cost Total Cost 1 60,000 $2.30 $138,000 2 50,000 2.40 120,000 3 50,000 2.55 127,500 4 70,000 2.65 185,500 230,000 $571,000 Operating expenses were $147,000, and the company’s income tax rate is 32%.

Instructions Gross profit:

(a) Prepare comparative condensed income statements for 2007 under FIFO and LIFO. FIFO $315,900

(Show computations of ending inventory.) LIFO $309,400

(b) Answer the following questions for management in business-letter form. e5

(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 the actual physical flow of goods? Why?

(4) How much more 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 FIFO?

Than LIFO? (Note: It is not necessary to quantify your answer.)

306 Calculate ending inventory, cost of goods sold, gross profit, and gross profit rate under periodic method;

compare results.

(SO 2, 3)

Gross profit:

LIFO $2,920 FIFO $3,320 Average $3,077 Compare specific identification, FIFO, and LIFO under periodic method;

use cost flow assumption to justify price increase.

(SO 2, 3)

===

Gross profit:

Specific identification $1,276 FIFO $1,403 LIFO $1,127 Compute inventory turnover ratio, days in inventory, and current ratio based on LIFO and after adjusting for LIFO reserve.

(SO 5, 6)

Caz CHAPTER 6 Reporting and Analyzing Inventory