I am having a problem understanding how to get FIFO and LIFO? I have this proble
ID: 2363739 • Letter: I
Question
I am having a problem understanding how to get FIFO and LIFO? I have this problem I can not figure out.he management of Kirchner Inc. asks your help in determining the comparative effects of the FIFO and LIFO inventory cost flow methods. For 2010 the accounting records show these data.
Inventory, January 1 (10,000 units) $35,000
Cost of 120,000 units purchased 471,000
Selling price of 95,000 units sold 730,000
Operating expenses 120,000
Units purchased consisted of 35,000 units at $3.70 on May 10; 60,000 units at $3.90 on August 15; and 25,000 units at $4.30 on November 20. Income taxes are 28%.
Explanation / Answer
Basically LIFO means last in first out while FIFO means first in first out. In a periodic inventory system like the one in this problem, LIFO means whatever is left on hand at the end of month if priced at the same price as the first batch of inventory and vice versa for FIFO. He sold 95,000 units for $730,000 35,000 units @ $3.70 60,000 units @ $3.90 25,000 units @ $4.30 The cost of goods sold under FIFO is (35,000 * $3.70) + (60,000 * $3.90) = $363,500 So gross profit is $366,500 under FIFO The cost of goods sold under LIFO is (25,000 * $4.30) + (60,000 * $3.90) + (10,000 * $3.70) = $378,500 So gross profit is $351,500 under FIFO As you can see, you can manipulate your earnings and thus your income tax (which is based proportionally off earnings) by adjusting your inventory costing principles.
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