What is the meaning of adding 96000and 10000 together ? What does the footnote w
ID: 2546053 • Letter: W
Question
What is the meaning of adding 96000and 10000 together ? What does the footnote want to convey? Why does it increase cost of good sold in question 14?Selected information from Sara Company 2006 annual report (December 31 Sara Com year-end) is shown below Inventories 2006 2005 80,000 Cost of Goods Sold $96,000 760,000 580,000 Inventories (footnote) Inventories are valued by the last in, first out (CLIFO) method. for inventories valued by the LIFO method amounted to approximately $10,000 at December 31, 2006 a respectively. Sara has used LIFO since 1980. The excess of current cost over the amount state $8,000 at December 31, 2005 13. The approximate current value of the inventory as of December 31, 2006 is: A. $96,000 B. $106,000. C. $114,000. D. $86,000. E. None of the above. Assuming a 40% income tax rate, the total amount Sara saved in income taxes in 2006 usingLIFO is. A. $10,000. B. $ 4,000. 14. c. s 2,000. D. S 800. E. None of the above 15. The percentage increase in ending inventory from 2005 to 2006 is: A.120% B.20% C.25% D. 125% E. None of the above.
Explanation / Answer
Q13 Answer is B. $ 106,000 Explanation: Current market value of invenory is computed through FIFO. Therefore, Inventory under FIFO will be as follows: Inventory as per LIFO 96000 Add: Adjustment for Allowance for difference in valuation 10000 Ending Inventory as per current market price 106000 Note: LIFO method presents inventory at initial cost and not current cost. However, the difference between current cost over amount at which Inventory is represened is given as $10,000 Therefore, to compute the current cost of inventory, we need to add the difference of $10,000 to inventory reflected by LIFO. Q14 Answer is D. $800 Explanantion: Increase in cost of goods sold: 2000 (10000-8000) Loss in income due to LIFO 2000 Tax saved @40% 800 Note: Difference in inventory at current cost over amount stated in LIFO have another effect of increasing the cost of goods sold under LIFO. The cost of goods sold under LIFO will be to the extent such difference goes on increasing. The difference wass $8000 in previous year to $10000 in current year. That means the current year COGS has been increased by $2,000 because of LIFO. Q15. Answer is B 20% Explanation: Beginning Inventory 80000 Ending Inventory 96000 Increase in Inventory 16000 % increase: 16000 /80000 *100 =20%
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