**Inventory Costing Methods: FIFO vs LIFO**### Purchase and Sales DataThe data below presents the inventory transactions for two items, A and B. Each transaction includes the number of units and unit cost.| Transaction | Inventory Item A | Inventory Item B ||---------------------|--------------------------|--------------------------|| | Units | Unit Cost | Units | Unit Cost || Beginning Inventory | 100 | $6.60 | 100 | $6.60 || Purchases, Feb 7 | 110 | $8.60 | 140 | $5.60 || Purchases, Mar 16 | 100 | $9.60 | 160 | $3.60 || Sales, Apr 28 | 270 | | 270 | |### Tasks Required1. **Compute Cost of Goods Sold (COGS):** - For each item (A and B) use both FIFO (First-In, First-Out) and LIFO (Last-In, First-Out) inventory costing methods.2. **Analysis:** - Determine which method (FIFO or LIFO) is preferable concerning: - (a) Net Income - (b) Income Taxes Paid (Cash Flow)### Data Input and CalculationThere is a table for entering the calculated COGS for both items A and B under FIFO and LIFO methods, which you need to compute:| Item | FIFO | LIFO ||--------|------|------|| Item A | | || Item B | | |### Study and Calculation Tips- **FIFO Method**: Calculate using the oldest inventory costs first for the cost of goods sold.- **LIFO Method**: Calculate using the newest inventory costs first for the cost of goods sold.Understanding these methods will help evaluate the impact of inventory accounting on financial statements and cash flow.

Introduction: FIFO stands for First In First out. Under this standard inventory method, oldest…

Required: 1. Compute cost of goods sold for each of the two items separately using the FIFO and LIFO inventory costing methods. 2. Between FIFO and LIFO, which method is preferable in terms of (a) net income and (b) income taxes paid (cash flow)? Complete this a

Required: 1. Compute cost of goods sold for each of the two items separately using the FIFO and LIFO inventory costing methods. 2. Between FIFO and LIFO, which method is preferable in terms of (a) net income and (b) income taxes paid (cash flow)? Complete this a

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Concept explainers

Overheads

In cost accounting, overhead refers to those expenses which occur during the operating of a business. Overhead includes the fixed, variable, or semi-variable which is not directly involved with a company product or service. It is very important to analyze overhead expense as it helps the company in determining how much a company must charge for its products and services so that they can generate profit. Overhead expenses depend upon the nature of the business operations.

Question

**Inventory Costing Methods: FIFO vs LIFO**

### Purchase and Sales Data

The data below presents the inventory transactions for two items, A and B. Each transaction includes the number of units and unit cost.

| Transaction | Inventory Item A | Inventory Item B |
|---------------------|--------------------------|--------------------------|
| | Units | Unit Cost | Units | Unit Cost |
| Beginning Inventory | 100 | $6.60 | 100 | $6.60 |
| Purchases, Feb 7 | 110 | $8.60 | 140 | $5.60 |
| Purchases, Mar 16 | 100 | $9.60 | 160 | $3.60 |
| Sales, Apr 28 | 270 | | 270 | |

### Tasks Required

1. **Compute Cost of Goods Sold (COGS):**
- For each item (A and B) use both FIFO (First-In, First-Out) and LIFO (Last-In, First-Out) inventory costing methods.

2. **Analysis:**
- Determine which method (FIFO or LIFO) is preferable concerning:
- (a) Net Income
- (b) Income Taxes Paid (Cash Flow)

### Data Input and Calculation

There is a table for entering the calculated COGS for both items A and B under FIFO and LIFO methods, which you need to compute:

| Item | FIFO | LIFO |
|--------|------|------|
| Item A | | |
| Item B | | |

### Study and Calculation Tips

- **FIFO Method**: Calculate using the oldest inventory costs first for the cost of goods sold.
- **LIFO Method**: Calculate using the newest inventory costs first for the cost of goods sold.

Understanding these methods will help evaluate the impact of inventory accounting on financial statements and cash flow.

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