Falcon.Com purchases its merchandise at current market costs and resells the product at a price

$20$ cents higher. Its inventory costs are constant throughout the current year. Data on the num$-$

ber of units in inventory at the beginning of the year, unit purchases, and unit sales are shown

here:

Number of units in inventory$$beginning of year $($@ $$1$ per unit cost$),1,000$ units

Number of units purchased during year @ $$1\mathrm{.}50$ per unit cost $,1,000$ units

Number of units sold during year @$$1\mathrm{.}70$ per unit selling price $,1,000$ units

CASE $4-2$

Financial Statement

Consequences of LIFO

and FIFO

The beginning$-$of$-$year balance sheet for

Falcon.Com reports the following:

Inventory $(1,000$ units @ $$1)...$ $$1,000$

Total equity. $.............$ $$1,000$

Required:

a$.$ Compute the after$-$tax profit of

Falcon.Com separately for both the $(1)$ FIF$0$ and $(2)$ LIF$0$ methods of inventory

valuation assuming the company has no expenses other than cost of goods sold and its income tax rate is $50\%.$

Taxes are accrued currently and paid the following year.

b$.$ If all sales and purchases are for cash, construct the balance sheet at the end of this year separately for both

the $(1)$ FIF$0$ and $(2)$ LIFO methods of inventory valuation.

c$.$ Describe the significance of each of these methods of inventory valuation for income determination and finan$-$

CHECK

$($b$)$ Total assets, FIF$0$:

cial position in a period of increasing costs.

$$1,700,$ LIF$0$: $$1,200$

d$.$ What problem does the LIFO method pose in constructing and analyzing interim financial statements?

$($CFA Adapted$)$