Page 273; BTN 6-6 Using the following data, each expert team must collaborate to
ID: 2464539 • Letter: P
Question
Page 273; BTN 6-6
Using the following data, each expert team must collaborate to develop a presentation that illustrates the relevant concepts and procedures for its inventory method - I need a LIFO method.
Data
The company uses a perpetual inventory system. It had the following beginning inventory and current year purchases of its product.
Jan. 1
Beginning inventory
50 units@$100
= $5,000
Jan. 14
Purchase
150 units@$120
= $18,000
Apr. 30
Purchase
200 units@$150
= $30,000
Sept. 26
Purchase
300 units@$200
= $60,000
The company transacted sales on the following dates at a $350 per unit sales price.
Jan. 10
30 units
(Specific cost: 30 @ $100)
Feb. 15
100 units
(Specific cost: 100 @ $120)
Oct. 5
350 units
(Specific cost: 100 @ $150 and 250 @ $200)
3a) Identify and compute the costs to assign to the units sold. (Round per unit costs to three decimals.)
3b) Identify and compute the costs to assign to the units in ending inventory. (Round inventory balances to the dollar.)
3c) How likely is it that this inventory costing method will reflect the actual physical flow of goods
How relevant is that factor in determining whether this an acceptable method to use?
3d) What is the impact of this method versus others in determining net income and income taxes?
3e) How closely does the ending inventory amount reflect replacement cost?
Jan. 1
Beginning inventory
50 units@$100
= $5,000
Jan. 14
Purchase
150 units@$120
= $18,000
Apr. 30
Purchase
200 units@$150
= $30,000
Sept. 26
Purchase
300 units@$200
= $60,000
Explanation / Answer
Working as per LIFO Method
3a) Costs to assign to the 480 units sold is $80,000.
3b) Costs to assign to the 220 units in ending inventory is $48000 as follows.
3c) LIFO Method does not always reflect the actual physical flow of goods becaise this menthod assumes that the goods purchased last will sold first. So inventory reflects goods purchased at old prices.
Relevancy of using LIFO - Accounting theorists may argue that financial statement presentations are enhanced by LIFO because it matches recently incurred costs with the recently generated revenues and lowers the revenue for income tax purpose.
3d) What is the impact of this method versus others in determining net income and income taxes?
The preceding results are consistent with a general rule that LIFO produces the lowest income (assuming rising prices), FIFO the highest, and weighted average an amount in between. Because LIFO tends to depress profits, one may wonder why a company would select this option; the answer is sometimes driven by income tax considerations. Lower income produces a lower tax bill, thus companies will tend to prefer the LIFO choice. Usually, financial accounting methods do not have to conform to methods chosen for tax purposes. However, in the U.S., LIFO "conformity rules" generally require that LIFO be used for financial reporting if it is used for tax purposes. In many countries LIFO is not permitted for tax or accounting purposes, and there is discussion about the U.S. perhaps adopting this global approach.
Accounting theorists may argue that financial statement presentations are enhanced by LIFO because it matches recently incurred costs with the recently generated revenues. Others maintain that FIFO is better because recent costs are reported in inventory on the balance sheet. Whichever method is used, it is important to note that the inventory method must be clearly communicated in the financial statements and related notes. LIFO companies frequently augment their reports with supplemental data about what inventory cost would be if FIFO were used instead. Consistency in method of application should be maintained. This does not mean that changes cannot occur; however, changes should only be made if financial reporting is deemed to be improved.
3e) How closely does the ending inventory amount reflect replacement cost?
This inventory accounting method seldom approximates replacement costs for inventory, which is one of its drawbacks. In addition, it usually does not correspond to the actual physical flow of goods
Goods Purchased Cost of Goods Old Inventory Balance Date Units Cost per Unit$ Total $ Units Cost per Unit$ Total $ Units Cost per Unit$ Total $ Jan-01 50 100 5,000 Jan-10 30 100 3,000 20 100 2,000 Jan-14 150 120 18,000 20 100 2,000 150 120 18,000 Feb-15 100 120 12,000 20 100 2,000 50 120 6,000 Apr-30 200 150 30,000 20 100 2,000 50 120 6,000 200 150 30,000 Sep-26 300 200 60,000 20 100 2,000 200 120 24,000 200 150 30,000 300 200 60,000 Oct-05 250 200 50,000 20 100 2,000 100 150 15,000 50 120 6,000 100 150 30,000 50 200 10,000 Total 700 113,000 480 80,000 220 48,000Related Questions
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