Exam II Review Spring 2018 How would ending inventory be reported on the balance

Question

Exam II Review Spring 2018 How would ending inventory be reported on the balance sheet if the market price per unit was ss and lower of cost or market applies? 2. a. b. If the FIFO cost flow assumption is used? If the LIFO cost flow assumption is used? 3. Fill in the following table with either FIFO or LIFO, assuming prices are rising. T Ending Inventory COGS Gross Profit Net Income Highest Lowest 4. Determining the effect of Inventory Errors- Fill in the following table: If Ending Inventory Is: Then: Cost of Goods Sold Gross Profit Net Income Total Assets RE (end of year) Overstated Understated

Explanation / Answer

Solution1:

Solution 2: Assuming Prices are rising

Ending Inventory

COGS

Gross Profit

Net Income

Highest

FIFO

LIFO

FIFO

FIFO

Lowest

LIFO

FIFO

LIFO

LIFO

In case of FIFO method, Last cost price will be higher since prices are rising. In case of LIFO the old cost price will be lower as compared to new market increased prices.

COGS is computed by Opening Stock+ Purchases- Closing Stock. Since closing stock will be higher under FIFO, COGS would be lower in case of FIFO method.

Closing Stock is reflected at Income side which in turn will increase the Gross Profit and Net Income. FIFO method has the high value of Closing Inventory so it will impact income positively as compared to LIFO.

Solution 3:

If Ending inventory is:

Overstated

Understated

Then:

Cost of Goods Sold

Is lower

Is higher

Gross Profit

Is higher

Is lower

Net Income

Is higher

Is lower

Total Assets

Is higher

Is lower

RE (end of year)

Is higher

Is lower

If closing inventory is undervalued, it will impact cost of goods sold positively while it will impact profits, income and asset side of balance sheet negatively.

Ending Inventory

COGS

Gross Profit

Net Income

Highest

FIFO

LIFO

FIFO

FIFO

Lowest

LIFO

FIFO

LIFO

LIFO

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