The Lewis Company is preparing to cost their ending inventory using either the F
ID: 2498439 • Letter: T
Question
The Lewis Company is preparing to cost their ending inventory using either the First In First Out Method or the Last In First Out Method. They are not comfortable with either method so the management team contacted you for help. They have provided you with the following information for the first quarter of the year.
Date
Item
Units
Unit Cost
Jan 1
Beginning
875
$ 7.40
Jan 20
Purchase
1,600
7.25
Feb 5
Purchase
1,400
6.95
March 2
Purchase
950
6.50
March 27
Purchase
1,700
6.10
Total
6,525
During the first quarter the company sold 5,375 units. The selling price for the units is $16.00 per unit and the income tax rate is 35%.
a. Prepare a worksheet to determine the ending inventory value and the cost of goods sold for the quarter using First In First Out, Periodic Method. Use the following titles on your worksheet, Date, Item, Units, Unit Cost, Total Cost, Ending Inventory Value, and Cost of Goods Sold Value.
b. Prepare a worksheet to determine the ending inventory value and the cost of goods sold for the quarter using; Last In First Out, Periodic Method. Use the following titles on your worksheet, Date, Item, Units, Unit Cost, Total Cost, Ending Inventory Value, and Cost of Goods Sold Value.
c. Prepare an income statement comparing FIFO Vs LIFO, use the following titles; Units Sold, Sales $, Cost of Goods Sold, Gross Profit, Operating Expenses (assume $0), Income before Taxes, Income Taxes, Net Income.
d. Which method will save income taxes for the company, please explain in detail to support your answer.
Date
Item
Units
Unit Cost
Jan 1
Beginning
875
$ 7.40
Jan 20
Purchase
1,600
7.25
Feb 5
Purchase
1,400
6.95
March 2
Purchase
950
6.50
March 27
Purchase
1,700
6.10
Total
6,525
Explanation / Answer
a. Ending Inventory Value and COGS using FIFO Method of Accounting b. Ending Inventory Value and COGS using LIFO Method of Accounting (All costs in $) (All costs in $) Date Item Units Unit Total Inventory Date Item Units Unit Total Inventory Cost Cost Value Cost Cost Value Jan-01 Beginning 875 7.40 6,475.00 6,475.00 Jan-01 Beginning 875 7.40 6,475.00 6,475.00 Jan-20 Purchase 1600 7.25 11,600.00 18,075.00 Jan-20 Purchase 1600 7.25 11,600.00 18,075.00 Feb-05 Purchase 1400 6.95 9,730.00 27,805.00 Feb-05 Purchase 1400 6.95 9,730.00 27,805.00 Mar-02 Purchase 950 6.50 6,175.00 33,980.00 Mar-02 Purchase 950 6.50 6,175.00 33,980.00 Mar-27 Purchase 1700 6.10 10,370.00 44,350.00 Mar-27 Purchase 1700 6.10 10,370.00 44,350.00 March Sales - COGS -875 7.40 -6,475.00 37,875.00 March Sales - COGS -1700 6.10 -10,370.00 33,980.00 March Sales - COGS -1600 7.25 -11,600.00 26,275.00 March Sales - COGS -950 6.50 -6,175.00 27,805.00 March Sales - COGS -1400 6.95 -9,730.00 16,545.00 March Sales - COGS -1400 6.95 -9,730.00 18,075.00 March Sales - COGS -950 6.50 -6,175.00 10,370.00 March Sales - COGS -1325 7.25 -9,606.25 8,468.75 March Sales - COGS -550 6.10 -3,355.00 7,015.00 Closing Balance 1150 7.36 8468.75 8,468.75 Closing Balance (out of March 27 purchases) 1150 6.10 7015 7,015.00 Cost of Goods Sold 35,881.25 Cost of Goods Sold 37,335.00 Closing Balance comprises of Jan 20 Purchase 275 7.25 1993.75 Beginning 875 7.4 6475 c. Income Statement (LIFO and FIFO Methods) (All values in $) Per FIFO Per LIFO Sales 5,375 units @ $ 16 86000.00 86000.00 Cost of Goods Sold 37335.00 35881.25 Gross Profit 48665.00 50118.75 Operating Expenses 0.00 0.00 Profit Before Taxes 48665.00 50118.75 Income Taxes @ 35% 17032.75 17541.56 Profit after Tax (Net Income) 31632.25 32577.19 d. Based on the workings given and the income statement above, it can be inferred that FIFO will save income taxes for the Company, although the Net Income therein may be lower (there is a reduction in income tax liability by $ 508.81 in FIFO as compared to LIFO).
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