The management of Knight Company has asked its accounting department to describe the effect upon the company’s financial position and its income statements of accounting for inventories on the LIFO rather than the FIFO basis during 2020 and 2021. The accounting department is to assume that the change to LIFO would have been effective on January 1, 2020, and that the initial LIFO base would have been the inventory value on December 31, 201 Presented below are the company’s financial statements and other data for the years 2020 and 2021 when the FIFO method was
The management of Knight Company has asked its accounting
department to describe the effect upon the company’s financial position and its income statements of accounting for inventories on
the LIFO rather than the FIFO basis during 2020 and 2021. The accounting department is to assume that the change to LIFO would
have been effective on January 1, 2020, and that the initial LIFO base would have been the inventory value on December 31, 201
Presented below are the company’s financial statements and other data for the years 2020 and 2021 when the FIFO method was
employed.
Financial Position as of
12/31/19 12/31/20 12/31/21
Cash $ 50,000 $ 75,000 $ 90,000
Accounts receivable 160,000 200,000 220,000
Inventory 280,000 315,000 336,000
Other assets 200,000 220,000 245,000
Total assets $690,000 $810,000 $891,000
Accounts payable $220,000 $235,000 $250,000
Other liabilities 80,000 90,000 120,000
Common stock 100,000 100,000 100,000
Retained earnings 290,000 385,000 421,000
Total liabilities and equity $690,000 $810,000 $891,000
Income for Years Ended
12/31/20 12/31/21
Sales revenue $1,920,000 $2,625,000
Less: Cost of goods sold 685,000 987,000
Other expenses 975,000 1,318,000
1,660,000 2,305,000
Income before income taxes 260,000 320,000
Income taxes (30%) 78,000 96,000
Net income $ 182,000 $ 224,000
Other data:
1. Inventory on hand at December 31, 2019, consisted of 70,000 units valued at $4.00 each.
2. Sales (all units sold at the same price in a given year):
2020-160,000 units @ $12.00 each 2021-210,000 units @ $12.50 each
3. Purchases (all units purchased at the same price in given year):
2020-160,000 units @ $4.50 each 2021-210,000 units @ $4.80 each
4. Income taxes at the effective rate of 30% are paid on December 31 each year.
Instructions
Name the account(s) presented in the financial statements that would have different amounts for 2021 if LIFO rather than FIFO
had been used, and state the new amount for each account that is named. Show computations.
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