Your inspection of the financial statements of other auto sales firms indicates
ID: 2485746 • Letter: Y
Question
Your inspection of the financial statements of other auto sales firms indicates that most of these firms adopted the LIFO method in the late 1970s. You further note that Cheap Auto has used 10% of depreciable asset cost when computing depreciation expense and that other automobile dealers use 20%. Assume that Cheap Auto's effective tax rate is 30% of income before tax. Also assume the following:
*The 2010 ending inventory was $420,000 (LIFO).
Required:
1. Compute cost of goods sold for 2011–2013, using both the FIFO and the LIFO methods.
2. Compute depreciation expense for Cheap Auto for 2011–2013, using both 10% and 20% of the cost of depreciable assets.
3. Recompute Cheap Auto's change in net income for 2011–2013, using LIFO and 20% depreciation. Enter 0 if a net loss is calculated. (Don't forget the tax impact of the increases in cost of goods sold and depreciation expense.) Round calculations and answers to the nearest whole dollar.
4. Does Cheap Auto appear to have materially changed its financial statements by the selection of FIFO (rather than LIFO) and 10% (rather than 20%) depreciation? (yes/no)______________
2013 2012 2011 Ending inventory (LIFO)* $518,000 $512,000 $476,000Explanation / Answer
1) COST OF GOODS SOLD
FIFO = OPening Inventory (FIFO) + Purchases - Closing Inventory (FIFO)
LIFO = OPening Inventory (LIFO) + Purchases - Closing Inventory (LIFO)
2) Depreciation Expenses
3) RECOMPUTATION OF NET INCOME
4) YES THERE IS MATERIAL CHANGE
COST OF GOODS SOLD YEAR FIFO LIFO 2011 4900000 4934000 2012 5090000 5164000 2013 5355000 5404000Related Questions
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