Mower-Blower Sales Co. started business on January 20, 2016. Products sold were

Question

Mower-Blower Sales Co. started business on January 20, 2016. Products sold were snow blowers and lawn mowers. Each product sold for $350. Purchases during 2016 were as follows: Blowers Mowers 18 $ 197 46 190 29 188 19 190 January 21 February 3 Fobruary 28 March 13 April 6 May 22 June 3 June 20 August 15 17 $214 50@ 218 38 220 64@ 235 18@ 218 17 214 19 197 The December 31, 2016, inventory included 9 blowers and 23 mowers. Assume the company uses a periodic inventory system. Required a-1. Compute ending inventory valuation at December 31, 2016, under the FIFO and LIFO cost-flow assumptions. (Hint Compute ending inventory under each method, and then compare results.) FIFO LIFO Blowers 1,970 $ 1,970 Mowers a-2. Is there any difference in valuation under LIFO and FIFO Yes No b. If the cost of mowers had increased to $248 each by December 1, and if management had purchased 30 mowers at that time and if it wants to minimize taxes, which cost-flow assumption was probably being used by the firm? LIFO FIFO

Explanation / Answer

a-1.

Working:

Blowers:

FIFO: 9 X $197 = $1773

9 blowers of the November 7 purchase will be there in the ending inventory.

LIFO: 9 X $197 = $1773

9 blowers of the January 21 purchase will be there in the ending inventory.

Mowers:

FIFO: (17 x $214) + (6 x $218) = $3638 + $1308 = $4946

Of the ending inventory of 23 mowers, 17 will be from the September 20 and 6 will be from the August 15 purchases.

LIFO: (17 x $214) + (6 x $218) = $3638 + $1308 = $4946

Of the ending inventory of 23 mowers, 17 will be from the April 6 and 6 will be from the May 22 purchases.

a-2. No

b. LIFO

With rising prices, under LIFO the cost of goods sold will be higher and ending inventory valuation will be lower thereby minimizing the net income and hence the taxes.

FIFO LIFO Blowers $       1,773 $       1,773 Mowers $       4,946 $       4,946

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