Case Study Cancel 9-1 LIFO Accounting at Tamar Chemicals 7000 kg of Rtu330. Current policy is to maintain a stock of Purchasing Policy Under LIFO 4000 kg. Because of the pending price drop, the purchasing agent suggests that the company should decrease inventory to Tamar Chemicals sells chemical compounds made from a mate- 600 kg by the end of 2018 and replenish it to the desired level rial known as Rtu330. The company has used LIFO as its inven- of 4,000 kg early next year. tory cost-flow assumption since it was founded 25 years ago. The chief accountant disagrees. If inventory falls to 600 The inventory of Rtu330 on December 31, 2017 com- kg at the end of 2018, the consumption of old, low-cost LIFO prised 4,000 kg, costing $161,200. Most of the cost comes layers will cause cost of goods sold to be unusually low. As a from inventory acquired in previous years, as shown in the fol- result, the company will face a high income tax liability. The lowing table: chief accountant suggests that Tamar plan 2018 purchases to maintain an end-of-year inventory of 4,000 kg. 2017 Year-end inventory Purchase Required Year acquired price per kg kg Cost 1. Assuming that sales for 2018 require 7,000 kg of Rtu330, 2008 $30 2,000 $60,000 calculate the cost of goods sold and the end-of-year 2013 46 200 9,200 inventory for 2018 if Tamar Chemicals follows the advice 2014 48 400 19,200 of the chief accountant. 2017 52 1,400 72,800 2. Recalculate cost of goods sold and the end-of-year inven- tory if the company follows the purchasing agent's advice. 4,000 $161,200 3. The CEO wants to know what discretion the company has to vary income in 2018 by planning its purchases of Rtu330 cost $62 per kg throughout most of 2018. It is Rtu330. If the firm follows the chief accountant's policy, now late 2018, and prices are not expected to change before net income for 2018 will be $60,000. What is the range of the end of the year. But Tamar's purchasing agent expects the net income that the company can report by managing pur- price to fall back to $57 early in 2019. Sales for 2018 require chases of Rtu330? Assume a tax rate of 30%.Case 9-1: LIFO Accounting at Tamar Chemicals Question 1: Chief Accountant # of Units (kg) Price per unit Cost Beginning Inventory 4,000 161,200 Plus: Purchases Less: Sales LIFO - only sold this year's items Equals Ending Inventory 4,000 Question 2: # of Units (kg) Price per unit Cost Cost of Good Sold using LIFO Inventory Beginning Inventory 4,000 161,200 Layer kg Cost Plus: Purchases Less: Sales 2017 Equals Ending Inventory 2014 2013 Purchases = Sales less units taken from inventory 2008 Cost of Good Sold Ending Inventory using LIFO Layer kg Cost Question 3: Step 1: Since selling the oldest inventory first, gives you a lower Cost of Good Sold, the income will be higher. The highest income that can be reported is to use all of your "old" inventory - bring the ending inventory down to "0" units, so you need to compute the Cost of Goods Sold with this assumption first. # of Units (kg) Price per unit Cost Cost of Good Sold using LIFO Inventory Beginning Inventory 4,000 161,200 Layer kg Cost Plus: Purchases 2018 Less: Sales 2017 Equals Ending Inventory 2014 2013 2008 Step 2: Calculate the difference in Cost of Goods Sold from #1 and at "0" Ending Inventoy Chief Accountant *Ending Inventory at 0 Difference Cost of Goods Sold This change is before tax so you have calculate the after tax amount below. Step 3: Calculate after tax difference in Income Difference from Step 2 multiplied by (1-.3) Step 4: Calculate Range in Net Income Chief Accountant's Policy $60,000 minimum With Ending Inventory of "0" maximum (must add additional income to Chief Accountant's Net Income)