The management of Gresa Inc. is reevaluating the appropriateness of using its pr
ID: 2339634 • Letter: T
Question
The management of Gresa Inc. is reevaluating the appropriateness of using its present inventory cost flow method, which is average-cost. The company requests your help in determining the results of operations for 2017 if either the FIFO or the LIFO method had been used. For 2017, the accounting records show these data:
Operating expenses were $150,000, and the company’s income tax rate is 30%
Prepare comparative condensed income statements for 2017 under FIFO and LIFO.
Answer the following questions for management.
please include all calculations and answers. thank you
Inventories Purchases and Sales Beginning (8,000 units) Ending (17,000 units) $850,700 473,000 $16,000 Total net sales (181,000 units) Total cost of goods purchased (190,000 units) Purchases were made quarterly as follows Quarter Units Unit Cost Total Cost $2.30 $115,000 96,000 100,000 162,000 $473,000 50,000 40,000 40,000 60,000 190,000 2.40 2.50 2.70 4Explanation / Answer
Solution 1:
Cost of ending inventory under FIFO will consist of units purchased in quarter 4
Cost of ending inventory FIFO = 17000 * $2.70 = $45,900
Cost of ending inventory under LIFO will consist of 8000 units in begining inventory and 9000 units from purchase in quarter 1.
Cost of ending inventory LIFO = $16,000 + (9000 * $2.30) = $36,700
Solution 2.1:
1. FIFO method produces the more meaningful inventory amount for the balance sheet
2. FIFO method produces the more meaningful net income
3. LIFO method is more likely to approximate the actual physical flow of goods
4. There will be no extra cash available for management under LIFO than under FIFO.
5. Gross profit under average cost method will be lower than FIFO
6. Gross profit under average cost method will be higher than LIFO
Gresa Inc. Condensed Income Statement For the year 2017 Particulars FIFO LIFO Sales Revenue $850,700.00 $850,700.00 Cost of goods sold: Beginning inventory $16,000.00 $16,000.00 Purchases $473,000.00 $473,000.00 Cost of goods available for sale $489,000.00 $489,000.00 Less: Ending inventory $45,900.00 $36,700.00 Cost of goods sold $443,100.00 $452,300.00 Gross Profit $407,600.00 $398,400.00 Operating expenses $150,000.00 $150,000.00 Income before taxes $257,600.00 $248,400.00 Income tax expense (30%) $77,280.00 $74,520.00 Net Income $180,320.00 $173,880.00Related Questions
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