The management of Gresa Inc. is reevaluating the appropriateness of using its present inventory cost flow method, which is average-cost. The company requests your help in determining the results of operations for 2017 if either the FIFO or the LIFO method had been used. For 2017, the accounting records show these data: Inventories   Purchases and Sales Beginning (7,000 units)   $14,000   Total net sales (236,000 units)   $1,038,400 Ending (21,000 units)       Total cost of goods purchased (250,000 units)   596,500 Purchases were made quarterly as follows. Quarter   Units   Unit Cost   Total Cost 1   65,000   $2.20   $143,000 2   55,000   2.30   126,500 3   55,000   2.40   132,000 4   75,000   2.60   195,000     250,000       $596,500 Operating expenses were $150,000, and the company’s income tax rate is 30%.           Prepare comparative condensed income statements for 2017 under FIFO and LIFO. GRESA INC. Condensed Income Statements     FIFO LIFO   $   $                                                                 $   $             Answer the following questions for management. (1)   Which cost flow method (FIFO or LIFO) produces the more meaningful inventory amount for the balance sheet?     (2)   Which cost flow method (FIFO or LIFO) produces the more meaningful net income?     (3)   Which cost flow method (FIFO or LIFO) is more likely to approximate the actual physical flow of goods?

FINANCIAL ACCOUNTING
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ISBN:9781259964947
Author:Libby
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Chapter1: Financial Statements And Business Decisions
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The management of Gresa Inc. is reevaluating the appropriateness of using its present inventory cost flow method, which is average-cost. The company requests your help in determining the results of operations for 2017 if either the FIFO or the LIFO method had been used. For 2017, the accounting records show these data:

Inventories
 
Purchases and Sales
Beginning (7,000 units)   $14,000   Total net sales (236,000 units)   $1,038,400
Ending (21,000 units)       Total cost of goods purchased (250,000 units)   596,500

Purchases were made quarterly as follows.

Quarter
 
Units
 
Unit Cost
 
Total Cost
1  
65,000
  $2.20  
$143,000
2  
55,000
  2.30  
126,500
3  
55,000
  2.40  
132,000
4  
75,000
  2.60  
195,000
   
250,000
     
$596,500

Operating expenses were $150,000, and the company’s income tax rate is 30%.
 
 
 
 
 
Prepare comparative condensed income statements for 2017 under FIFO and LIFO.

GRESA INC.
Condensed Income Statements
 
 
FIFO
LIFO
 
$
 
$
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
 
$
 
 
 
 
 
 
Answer the following questions for management.

(1)   Which cost flow method (FIFO or LIFO) produces the more meaningful inventory amount for the balance sheet?  
 
(2)   Which cost flow method (FIFO or LIFO) produces the more meaningful net income?  
 
(3)   Which cost flow method (FIFO or LIFO) is more likely to approximate the actual physical flow of goods?  
 
(4)   How much more cash will be available for management under LIFO than under FIFO?   $
 
(5)   Will gross profit under the average-cost method be higher or lower than FIFO?  
 
    Will gross profit under the average-cost method be higher or lower than LIFO?  
 
 

 

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