Data from Trail Bikes, Inc.\'s perpetual inventory records for a tire it produce
ID: 2445944 • Letter: D
Question
Data from Trail Bikes, Inc.'s perpetual inventory records for a tire it produces and sells follow:
The company sold 53,000 tires during the year at $20 each.Required:
A. Compute the cost of the ending inventory and the cost of goods sold using both FIFO and LIFO.
B. In your opinion, which of the two methods is a better representation of the balance sheet value for the inventory? Why?
C. What is the gross margin using each method?
D. Which method do you think is more representative of the firm's income? Why?
Explanation / Answer
A. Valuation of inventory : Closing balance in Qty after all Opening + stock added in Finished goods - Sales = 8000 units.
Under FIFO method , the valuation will be 8000 from the last batch purchased @11.95 = 8000 x 11.95 =$95,600
Under LIFO method, the valuation will be : 6000 from opening stock @ 12.25 and 2000 from first lot purchased for the year @12.2 which is 6000 x 12.25 + 2000 x 12.20 =$97,900
B. in my opinion FIFO method is a better representation of the balance sheet value for the inventory. Its due to FIFO inventory accounting provides more accurate inventory valuations since the assumption is the items remaining in inventory were purchased at more recent--and typically higher--prices.
C. Gross margin working under both the methods
D. It depends upron what is looked into as a strategy.
From Tax perspective : Will consider LIFO accounting ove FIFO as LIFO will typically result in lower taxable income compared to the FIFO. On the flip side, LIFO also results in a weaker balance sheet since the value of your inventory is lower.
But keeping in mind to maintain a relatively strong balance sheet--to qualify for loans, to satisfy investors, or to impress analysts--FIFO may be the way to go. Also to consider short- and long-term goals for decision making.
Hope this helps.
Gross Margin calculation FIFO LIFO Sales 1,060,000 1,060,000 Cost of Goods sold Opening 73,500 73,500 (6000 @12.25) Add FG Manufactured 663,600 663,600 =(12000*12.2+15000*12.1+11000*12.05+17000*11.95) Less : Closing stock (95,600) (641,500) (97,900) (639,200) ( as calculated above under both methods) Gross Margin 418,500 420,800Related Questions
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