The management of Gilbert Inc. is reevaluating the appropriateness of using its present inventory cost flow method,
Question:
The management of Gilbert Inc. is reevaluating the appropriateness of using its present inventory cost flow method, which is average-cost. The company requests your help in determining the results of operations for 2014 if either the FIFO or the LIFO method had been used. For 2014, the accounting records show these data:
Inventories Purchases and Sales Beginning (8,000 units) $16,000 Total net sales (188,000 units) $780,000 Ending (15,000 units) Total cost of goods purchased
(195,000 units) 480,500 Purchases were made quarterly as follows.
Quarter Units Unit Cost Total Cost 1 50,000 $2.20 $110,000 2 40,000 2.40 96,000 3 45,000 25 112,500 4 60,000 2.70 162,000 195,000 $480,500 Operating expenses were $130,000, and the company’s income tax rate is 36%.
Instructions
(a) Prepare comparative condensed income statements for 2014 under FIFO and LIFO.
(Show computations of ending inventory.)
(b) 22> 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 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.)
Step by Step Answer:
Financial Accounting
ISBN: 9780470929384
8th Edition
Authors: Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso, J. Mather