The Mongo Oil Company, expecting that decreases in oil prices are only temporary, increases its monthly purchases as the price of oil decreases. Mongos monthly oil purchases follow:

Period Quantity (bbl) Price/bbl

First Quarter

January.................... 100,000 $25

February.................. 100,000 25

March...................... 100,000 25

Second Quarter

April....................... 125,000 20

May........................ 125,000 20

June........................ 125,000 20

Third Quarter

July......................... 150,000 18

August..................... 150,000 18

September................ 150,000 18

Fourth Quarter

October.................... 200,000 15

November................ 200,000 15

December................. 200,000 15

Assumptions:

• The company has no beginning inventory.
• Sales are 100,000 barrels per month for the period January through June, and 150,000 per month for the period July through December.
• Mongo uses the LIFO inventory method.
• The companys tax rate is 40%.
  1. Compute the difference in each of the following dollar amounts that Mongo would report under its present accounting method (LIFO), as compared with use of the FIFO method (note: the solution does not require long calculations; focus on the differences between FIFO and LIFO levels, not the actual amounts).
     1. Inventory purchases
     2. Ending inventory
     3. COGS
     4. Pretax income
     5. Income tax expense
     6. Net income
     7. CFO
     8. Ending working capital
  2. Assume that Mongo liquidates its entire inventory at year-end. Discuss how the answers to part a would differ.