The following information relates to Ayala Corporation purshasing activities: As
ID: 2422331 • Letter: T
Question
The following information relates to Ayala Corporation purshasing activities:
Assume there are 250 Units at hand at the end of the year
A) Compute the Ending Inventory and COGS assuming Ayala follows IFRS and uses the FIFO method. B) Compute the Ending Inventory and COGS assuming Ayala follows US GAAP and uses LIFO. C) How will the differences between FIFO and LIFO affect Ayala's Financial Statements?
July 1 Balance 500 Units @ $7 August 1 Purshased 300 Units @$9 September 1 Purshased 150 Units @ $10Explanation / Answer
A) Total Units sold = 500 + 300 + 150 - 250 = 700 units
Under FIFO method, ending inventory consists of the most recent purchases. Thus the stock of 250 would consist of purchases of August and Septmeber
Valuation :
September Inventory = 150 * 10 = 1500
Balance ( August) = 100 * 9 = 900
Total Inventory as per FIFO = $2400
Opening inventory value = 500 * 7 = $3500
Total purchases = 300 * 9 + 150 * 10 = $4200
Cost of Goods Sold = Opening Inventory + Purchases - Closing stock = 3500 + 4200 - 2400 = 5300
B) Under LIFO method, ending inventory would consist of the beginning purchases which in our case is from the opening balance
Ending inventory value (LIFO) = 250 * 7 = 1750
Cost of Goods Sold = 3500 + 4200 - 1750 = $5950
C) In the given case, we see that prices have increased from $ 7 to $ 10, which indicates an inflationary environment. When in inflation, FIFO closing stock would be higher as it includes recent purchases at higher rates. Following this, Cost of Goods sold rises and profitability increases and Current ratio is better
Under LIFO, stock would be valued at the least price in inflationary environment and COGS would be expensed at the highest prices , thereby driving down profitability and current ratio
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