1.Compute the cost of goods sold, inventory, inventory available for sale, sales, and gross profit for the years 2005, 2006 and 2007 using weighted average method.

2.Compute the cost of goods sold, inventory, inventory available for sale, sales, and gross profit for the years 2005, 2006 and 2007 using FIFO method.

3.Compute the cost of goods sold, inventory, inventory available for sale, sales, and gross profit for the years 2005, 2006 and 2007 using LIFO method.

4.What will be the LIFO reserve for each year?

5.In which years LIFO Liquidation occurs?

6.In what situation LIFO cost of inventories will be higher than FIFO?

7.In what situation FIFO cost of inventories will be higher than LIFO?

8.In what situation FIFO cost of inventories will be higher than Weighted Average Method?

9.In what situation FIFO cost of inventories will be Lower than Weighted Average Method?

412 International Financial Statement Analysis EXAMPLE 107 LIFO Liquidation Illustration Industrial Fan Sales, Inc. (IFS), a hypothetical company, sells an industrialgrade fan at retail and has been in business since 2004. Exhibit 107 provides relevant data and nancial statement information about IFS's inventory purchases and sales of fan inven tory for the years 2004 through 2007. IFS uses the LIFO inventory method. What is IFS's inventory phantom gross prot for 2007? EXHIBIT 10-7 IFS Financial Statement information under LIFO 2004 2005 2006 2007 Fansunits purchased 12,000 12,000 12,000 12,000 Purchase cost per fan $100 $105 $110 $115 Fansunits sold 10,000 10,000 10,000 16,000 Sales price per fan $200 $205 $210 $215 LIFO Method Beginning inventory $0 $200,000 $410,000 $630,000 Purchases 1,200,000 1,260,000 1,320,000 1,380,000 Goods available for sale 1,200,000 1,460,000 1,730,000 2,010,000 Ending inventory (200,000) (410,000) (630,000) (200,000) Cost of goods sold $1,000,000 1,050,000 $1,100,000 $1,810,000 Income Statement Sales $2,000,000 $2,050,000 $2,100,000 $3,440,000 Cost of goods sold 1,000,000 1,050,000 1,100,000 1,810,000 Gross prot $1,000,000 $1,000,000 $1,000,000 $1,630,000 Balance Sheet Inventory $200,000 $410,000 $630,000 $200,000 Solution. IFS's phantom gross prot for 2007 is $30,000. The reported gross prot is $1,630,000. If IFS had purchased 16,000 fans in 2007 rather than 12,000 fans, the cost of goods sold under the LIFO method would have been $1,840,000 (16,000 fans sold at $115.00 purchase cost per fan), and the reported gross prot would have been $1,600,000 ($3,440,000 reported sales less $1,840,000 cost of goods sold). The phan tom gross prot is thus $30,000 ($1,630,000 reported gross prot less the $1,600,000 gross prot that would have been reported without the LIFO liquidation). The phan tom gross prot may alternatively be determined by multiplying the number of units liquidated times the difference between the replacement cost of the units liquidated and their historical purchase cost. For IFS, the $30,000 phantom gross prot would be the 2,000 fans that are liquidated from its LIFO inventory from 2006 multiplied by $5.00 per fan ($215 replacement cost per fan less the $210 historical cost per fan) plus the 2,000 fans that are liquidated from its LIFO inventory from 2005 multiplied by $10 per fan ($215 replacement cost per fan less the $205 historical cost per fan)