Analyzing and Interpreting the Effects of the LIFO/FIFO Choice on Inventory Turnover Ratio LO7-5, 7-6

The records at the end of January of the current year for Young Company showed the following for a particular kind of merchandise:

Beginning Inventory at FIFO: 15 Units @ $16 = $240

Beginning Inventory at LIFO: 15 Units @ $12 = $180

Transactions	Units	Unit Cost				Total Cost
Purchase, January 9	29	$	14			$	406
Purchase, January 20	52		19				988
Sale, January 21 (at $43 per unit)	37
Sale, January 27 (at $44 per unit)	25

Required:

1. Compute the inventory turnover ratio for the month of January under the FIFO and LIFO inventory costing methods. (Do not round intermediate calculations and round your final answers to 2 decimal places.)

2. Which costing method is the more accurate indicator of the efficiency of inventory management?

LIFO or FIFO or No accuracy difference

Evaluating the Income Statement and Cash Flow Effects of Lower of Cost or Market LO7-4

[The following information applies to the questions displayed below.] Jaffa Company prepared its annual financial statements dated December 31 of the current year. The company applies the FIFO inventory costing method; however, the company neglected to apply LCM to the ending inventory. The preliminary current year income statement follows:

Sales revenue				$	293,000
Cost of goods sold
Beginning inventory	$	34,300
Purchases		197,000
Goods available for sale		231,300
Ending inventory (FIFO cost)		61,661
Cost of goods sold					169,639
Gross profit					123,361
Operating expenses					63,300
Pretax income					60,061
Income tax expense (35%)					21,021
Net income				$	39,040

Assume that you have been asked to restate the current year financial statements to incorporate LCM. You have developed the following data relating to the current year ending inventory:

		Acquisition Cost				Net Realizable Value
Item	Quantity	Unit		Total		(Market)
A	3,180	$	4.3	$	13,674	$	3.3
B	1,630		3.8		6,194		5.3
C	7,230		3.8		27,474		1.8
D	3,330		4.3		14,319		6.3
	Required: 1. Prepare the income statement to reflect LCM valuation of the current year ending inventory. Apply LCM on an item-by-item basis (Round your answers to nearest dollar amount.)

Required:

1. Prepare the income statement to reflect LCM valuation of the current year ending inventory. Apply LCM on an item-by-item basis (Round your answers to nearest dollar amount.)

JAFFA COMPANY
Income Statement (LCM basis)
For the Year Ended December 31, Current Year
	0

2. Compare the LCM effect on each amount that was changed on the income statement in requirement (1). (Decreases should be indicated by a minus sign.)(Round your answers to nearest dollar amount.)

Item Changed	FIFO Cost Basis	LCM Basis	Amount of Change (Decrease)
Ending inventory
Cost of goods sold
Gross profit
Pretax income
Income tax expense
Net income