The following table contains inventory and cost of goods sold data for Amerada H

Question

The following table contains inventory and cost of goods sold data for Amerada Hess, a major oil producer and refiner. The firm uses the FIFO method. Inventories at year end ($ in millions)

                                                   2008 2009

Crude Oil                                       299 250

Refined and other finished products 436 583

                                                    735 833

Cost of products sold    4,287 4,450

Calculate Amerada’s current cost of goods sold assuming that U.S. Commerce Department statistics indicate prices of oil products increased by 10% during 2009.

A. $4,360.50. B. $4,370.30. C. $4,523.50. D. $4,533.30

Explanation / Answer

Answer:

Amerada’s current cost of goods sold =C)4523.50

Working notes for the above answer is as under

If the increase in specific price index for oil products was 10% in 2009, then the addition to FIFO COGS would be

= $73.5 million (10% x 735 million), where the latter is the inventory balance at the beginning of 2009.

This $73.5 million, it should be noted, is the holding gain portion of the income reported under the FIFO method.

Removing the holding gain from income (adding it to COGS) results in a better measure of reported income

($ in millions):

COGS (reported) for 2009

4450

Adjustment for holding gain
(735*10%)

73.5

COGS (approximate LIFO)

4523.5

So Amerada’s current cost of goods sold =4523.50

($ in millions):

COGS (reported) for 2009

4450

Adjustment for holding gain
(735*10%)

73.5

COGS (approximate LIFO)

4523.5

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