suppose you are considering investing in two business, PanAm who use Fifo invent

Question

suppose you are considering investing in two business, PanAm who use Fifo inventory costing and Lucerne Dairies who use Lifo inventory costing. The two companies are virtually identical, and both began operations at the beginning of the current year. During the year, each company purchased inventory as follows:

Jan4 – 12000 units at $4 = $48000

Apr6- 5000 units at 5 = 25000

Aug9 7000 units at 6 = 42000

Nov27 10000 units at 7 = 70000

Totals 34000 units - $185000

During the first year both companies sold 25000 units of inventory.

Both companies trial balances at December 31 included the following:

Sales revenue $300000

Purchases 185000

Operating expenses 80000

Required (with explanation of how to solve)

1-Prepare both companies income statements

2-Explain why one company appears to be more profitable than the other

Explanation / Answer

Jan4 – 12000 units at $4 = $48000 FIFO method total unit sold Apr6- 5000 units at 5 = 25000 total unit left In inventory 63000 Aug9 7000 units at 6 = 42000 Lucerne Dairies LIFO method Nov27 10000 units at 7 = 70000 total unit sold total unit left In inventory 36000 Totals 34000 units - $185000 Income Statement PanAm Income Statement Lucerne Dairies sales 300000 sales 300000 cost of goods sold 122000 cost of goods sold 149000 purchases 185000 purchases 185000 less closing inventory 63000 less closing inventory 36000 Gross profit 178000 Gross profit 151000 operating expenses 80000 operating expenses 80000 Net Profit 98000 Net Profit 71000 PanAm is looking more profitable because it is valuing its closing inventory at fifo method so it is charging its closing inventory at low rates and in Lifo it charges it inventory at latest price. This is the main reason in change in profitability of both the companies

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.