E7-7 (Algo) Analyzing and Interpreting the Financial Statement Effects of LIFO and FIFO LO7-2, 7-3

[The following information applies to the questions displayed below.]

Emily Company uses a periodic inventory system. At the end of the annual accounting period, December 31 of the current year, the accounting records provided the following information for product 2:

			Units			Unit Cost
Inventory, December 31, prior year				2,950			$	14
For the current year:
Purchase, April 11				8,920				15
Purchase, June 1				7,860				20
Sales ($54 each)				10,860
Operating expenses (excluding income tax expense)	$	189,500

E7-7 Part 1

Required:

1. Prepare a separate income statement through pretax income that details cost of goods sold for (a) Case A: FIFO and (b) Case B: LIFO.

Cost of goods sold:
not attempted	$41,300selected answer correct	not attempted	not attempted	not attempted
not attempted	124,880selected answer incorrect	not attempted	not attempted	not attempted
not attempted	not attempted	not attempted	not attempted	not attempted
Goods available for sale	166,180		0
not attempted	not attempted	not attempted	not attempted	not attempted
not attempted	not attempted	not attempted	not attempted	not attempted
Cost of goods sold		not attempted		not attempted

2.

E7-7 (Algo) Analyzing and Interpreting the Financial Statement Effects of LIFO and FIFO LO7-2, 7-3

[The following information applies to the questions displayed below.]

Emily Company uses a periodic inventory system. At the end of the annual accounting period, December 31 of the current year, the accounting records provided the following information for product 2:

			Units			Unit Cost
Inventory, December 31, prior year				2,950			$	14
For the current year:
Purchase, April 11				8,920				15
Purchase, June 1				7,860				20
Sales ($54 each)				10,860
Operating expenses (excluding income tax expense)	$	189,500

E7-7 Part 2

2. Compute the difference between the pretax income and the ending inventory amount for the two cases.

3.

7-7 (Algo) Analyzing and Interpreting the Financial Statement Effects of LIFO and FIFO LO7-2, 7-3

[The following information applies to the questions displayed below.]

Emily Company uses a periodic inventory system. At the end of the annual accounting period, December 31 of the current year, the accounting records provided the following information for product 2:

			Units			Unit Cost
Inventory, December 31, prior year				2,950			$	14
For the current year:
Purchase, April 11				8,920				15
Purchase, June 1				7,860				20
Sales ($54 each)				10,860
Operating expenses (excluding income tax expense)	$	189,500

E7-7 Part 3

3. Which inventory costing method may be preferred for income tax purposes?

4.

E7-18 (Algo) Analyzing the Effect of an Inventory Error Disclosed in an Actual Note to a Financial Statement LO7-7

Several years ago, the financial statements of Montgomery Greeting Cards, now part of Nation Salutations, contained the following note:

On July 1, the Company announced that it had determined that the inventory . . . had been overstated. . . . The overstatement of inventory . . . was $8,796,000.

Montgomery Greeting Cards reported an incorrect net income amount of $25,872,000 for the year in which the error occurred and the income tax rate was 39.40 percent.

Required:

1. Compute the amount of net income that Montgomery Greeting Cards reported after correcting the inventory error.

Compute the amount of net income that Montgomery Greeting Cards reported after correcting the inventory error.

Corrected net income

2. Assume that the inventory error was not discovered. Identify the financial statement accounts that would have been incorrect (a) for the year the error occurred and (b) for the subsequent year. State whether each account was understated, overstated, or had no effect.

(a) for the year the error occurred and (b) for the subsequent year. State whether each account was understated, overstated, or had no effect.

Account	Year of Error	Subsequent Year
Beginning inventory
Cost of goods sold
Ending inventory
Income tax expense
Net income
Retained earnings
Taxes payable