Problem 6-4A Inventories Purchases and Sales Quarter Units Unit Cost Total Cost

Question

Problem 6-4A

Inventories

Purchases and Sales

Quarter

Units

Unit Cost

Total Cost

75,000

$153,750

60,000

132,000

60,000

141,000

90,000

229,500

285,000

$656,250

FIFO

LIFO

Problem 6-4A

The management of Felipe 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:

Inventories

Purchases and Sales

Beginning (10,500 units) $21,000 Total net sales (270,000 units) $1,120,500 Ending (25,500 units) Total cost of goods purchased (285,000 units) 656,250
Purchases were made quarterly as follows.

Quarter

Units

Unit Cost

Total Cost

1

75,000

$2.05

$153,750

2

60,000

2.20

132,000

3

60,000

2.35

141,000

4

90,000

2.55

229,500

285,000

$656,250

Operating expenses were $130,000, and the company’s income tax rate is 40%.

Explanation / Answer

ending inventory for FIFO= 2.55*25500=65025

for LIFO= 21000+(25500-10500)*2.05=51750

(1) The FIFO method produces the most meaningful inventory amount
for the balance sheet because the units are costed at the most
recent purchase prices.

(2) The LIFO method produces the most meaningful net income because
the costs of the most recent purchases are matched against sales.

(3) The FIFO method is most likely to approximate actual physical
flow because the oldest goods are usually sold first to minimize
spoilage and obsolescence.

(4) There will be $5,440 additional cash available under LIFO because
income taxes are $54,060 under LIFO and $59,500 under FIFO.

(5) Gross profit under the average cost method will be: (a) lower than
FIFO and (b) higher than LIFO.

Particulars FIFO LIFO Sales 1120500 1120500 Cost of goods sold Beginning inventory 21000 21000 Cost of goods purchased 656250 656250 Cost of goods available for sale 677250 677250 Ending inventory 65025 51750 Cost of goods sold 612225 625500 Gross profit 508275 495000 Operating expenses 130000 130000 Income before income taxes 378275 365000 Income taxes (40%) 151310 146000 Net income 226965 219000

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