question archive The management of Maltwo Co
The management of Maltwo Co
Subject:AccountingPrice:2.87 Bought7
The management of Maltwo Co. asks your help in determining the comparative effects of the FIFO and LIFO inventory cost flow methods. For 2015, the accounting records show the following data.
Inventory, January 1 (10,000 units) $ 37,000
Cost of 110,000 units purchased 479,000
Selling price of 90,000 units sold 720,000
Operating expenses 150,000
Units purchased consisted of 40,000 units at $4.20 on May 10; 50,000 units at $4.40 on August 15; and 20,000 units at $4.55 on November 20.
Income taxes are 30%.
Instructions
(a) Prepare comparative condensed income statements for 2015 under FIFO and LIFO. (Show computations of ending inventory.)
(b) Answer the following questions for management.
(1) Which inventory cost flow method produces the most meaningful inventory amount for the balance sheet? Why?
(2) Which inventory cost flow method produces the most meaningful net income? Why?
(3) How much additional cash will be available for management under LIFO than under FIFO? Why?
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Answer:
a)
| FIFO | LIFO | |
| Sales | $720,000 | $720,000 |
| less:cost of goods sold | (381,000) | (395,000) |
| Gross profit | 339,000 | 325,000 |
| less:operating expense | (150,000) | (150,000) |
| income before taxes | 189,000 | 175,000 |
| less:Tax @30% | (56,700) | (52,500) |
| Net income | 132,300 | 122,500 |
COGS(FIFO)= 10,000*3.7+ 40,000*4.20 +40,000*4.4 = $381,000
COGS(LIFO) = 20,000*4.55 + 50,000*4.40 +20,000*4.20 = 395,000
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b) 1) FIFO method since the units in its case are shown as the most recent purchase price 2)LIFO as the cost of the most recent purchases are matched with sales 3) Addittional cash under LIFO will be $4,200 (56,700 - $52,500) |
