P7-3 Evaluating Four Alternative Inventory Methods Based on Income and Cash Flow
ID: 2654387 • Letter: P
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P7-3 Evaluating Four Alternative Inventory Methods Based on Income and Cash Flow LO7-2, 7-3 At the end of January 2014, the records of Donner Company showed the following for a particular item that sold at $16 per unit: Transactions Units Amount Inventory, January 1, 2014 500 $ 2,365 Purchase, January 12 600 3,600 Purchase, January 26 160 1,280 Sale (370) Sale (250) Required: 1a. Compute Cost of Goods Sold under each method of inventory: average cost, FIFO, LIFO, and specific identification. For specific identification, assume that the first sale was selected from the beginning inventory and the second sale was selected from the January 12 purchase. (Round unit price to 2 decimal places. Input all amounts as positive values.) Input areas are shaded. Average Cost Cost of Good Available for Sale Cost of Goods Sold # of Units Cost per Unit Cost of Goods Available for Sale # of Units Sold Cost per Unit Cost of Goods Sold Beginning inventory Purchases: January 12, 2014 January 26, 2014 Total FIFO Cost of Goods Available for Sale Cost of Goods Sold # of Units Cost per Unit Cost of Goods Available for Sale # of Units Sold Cost per Unit Cost of Goods Sold Beginning inventory 500 $0 Purchases: January 12, 2014 600 $0 January 26, 2014 160 $0 Total 1,260 $0 0 LIFO Cost of Goods Available for Sale Cost of Goods Sold # of Units Cost per Unit Cost of Goods Available for Sale # of Units Sold Cost per Unit Cost of Goods Sold Beginning inventory 500 Purchases: January 12, 2014 600 January 26, 2014 160 Total 1,260 $ - 0 $ 4,040 Specific Identification Cost of Goods Available for Sale Cost of Goods Sold # of Units Cost per Unit Cost of Goods Available for Sale # of Units Sold Cost per Unit Cost of Goods Sold Beginning inventory 500 Purchases: January 12, 2014 600 January 26, 2014 160 Total 1,260 $ - 0 Required: 2a. FIFO and LIFO, which method would result in the higher pretax income? 2b. FIFO and LIFO, which would result in the higher EPS? 3 FIFO and LIFO, which method would result in the lower income tax expense? Assume a 30 percent average tax rate. 4 FIFO and LIFO, which method would produce the more favorable cash flow? P7-3 Evaluating Four Alternative Inventory Methods Based on Income and Cash Flow LO7-2, 7-3 At the end of January 2014, the records of Donner Company showed the following for a particular item that sold at $16 per unit: Transactions Units Amount Inventory, January 1, 2014 500 $ 2,365 Purchase, January 12 600 3,600 Purchase, January 26 160 1,280 Sale (370) Sale (250) Required: 1a. Compute Cost of Goods Sold under each method of inventory: average cost, FIFO, LIFO, and specific identification. For specific identification, assume that the first sale was selected from the beginning inventory and the second sale was selected from the January 12 purchase. (Round unit price to 2 decimal places. Input all amounts as positive values.) Input areas are shaded. Average Cost Cost of Good Available for Sale Cost of Goods Sold # of Units Cost per Unit Cost of Goods Available for Sale # of Units Sold Cost per Unit Cost of Goods Sold Beginning inventory Purchases: January 12, 2014 January 26, 2014 Total FIFO Cost of Goods Available for Sale Cost of Goods Sold # of Units Cost per Unit Cost of Goods Available for Sale # of Units Sold Cost per Unit Cost of Goods Sold Beginning inventory 500 $0 Purchases: January 12, 2014 600 $0 January 26, 2014 160 $0 Total 1,260 $0 0 LIFO Cost of Goods Available for Sale Cost of Goods Sold # of Units Cost per Unit Cost of Goods Available for Sale # of Units Sold Cost per Unit Cost of Goods Sold Beginning inventory 500 Purchases: January 12, 2014 600 January 26, 2014 160 Total 1,260 $ - 0 $ 4,040 Specific Identification Cost of Goods Available for Sale Cost of Goods Sold # of Units Cost per Unit Cost of Goods Available for Sale # of Units Sold Cost per Unit Cost of Goods Sold Beginning inventory 500 Purchases: January 12, 2014 600 January 26, 2014 160 Total 1,260 $ - 0 Required: 2a. FIFO and LIFO, which method would result in the higher pretax income? 2b. FIFO and LIFO, which would result in the higher EPS? 3 FIFO and LIFO, which method would result in the lower income tax expense? Assume a 30 percent average tax rate. 4 FIFO and LIFO, which method would produce the more favorable cash flow?Explanation / Answer
1a.
Average Cost
Cost of Goods
Available for Sale
# of Units
Sold
Cost of Goods
Sold
FIFO
Cost of Goods
Available for Sale
# of Units
Sold
Cost of Goods
Sold
LIFO
Cost of Goods
Available for Sale
# of Units
Sold
Cost of Goods
Sold
Specific Identification
Cost of Goods
Available for Sale
# of Units
Sold
Cost of Goods
Sold
2a.
Sales (620x16) 9920
- COGS (FIFO) 3085
Pretax Income 6835
Sales 9920
- COGS (LIFO) 4040
Pre Tax Income 5880
FIFO will result in higher pre tax income.
2b.
Since, FIFO results in higher income, it will also result in higher EPS.
3.
Tax Expense (FIFO) = 6835x0.30 = 2051
Tax Expense (LIFO) = 5880x0.30 = 1764
FIFO will result in higher income tax expense
4.
FIFO would produce the more favorable cash flows
#of Units Cost p.u.Cost of Goods
Available for Sale
# of Units
Sold
Cost p.u.Cost of Goods
Sold
Beginning InVentory 500 4.73 2365 Purchases: Jan 12 600 6 3600 Jan 26 160 8 1280 Total 1260 5.75 7245 620 5.75 3565Related Questions
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