FINANCIAL ACCOUNTING (LL)
FINANCIAL ACCOUNTING (LL)
10th Edition
ISBN: 9781266449512
Author: Libby
Publisher: MCG
Question
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Chapter 7, Problem 5P

1.

To determine

Complete the preceding tabulation for each situation.

1.

Expert Solution
Check Mark

Answer to Problem 5P

Prices RisingPrices Falling
ParticularsABCD
FIFOLIFOFIFOLIFO
Sales revenue (a) (1)$15,000$15,000$15,000$15,000
Beginning inventory3,3003,3003,6003,600
Add: Purchases4,8004,8004,4004,400
Goods available for sale Table (2)8,1008,1008,0008,000
Less: Ending inventory   2,400  Table (3)   2,200  Table (4)   2,200  Table (5)   2,400  Table (6)
Cost of goods sold (b) Table (7)5,7005,9005,8005,600
Gross profit (ab)9,3009,1009,2009,400
Less: Expenses4,0004,0004,0004,000
Pretax income5,3005,1005,2005,400
Less: Income tax expense1,5901,530 (2)1,560 (3)1,620 (4)
Net income$3,710$3,570$3,640$3,780

Table (1)

Explanation of Solution

Periodic Inventory System:

Periodic inventory system is a system, in which the inventory is updated in the accounting records on a periodic basis such as at the end of each month, quarter or year. In other words, it is an accounting method which is used to determine the amount of inventory at the end of each accounting period.

First-in-First-Out:

In First-in-First-Out method, the costs of the initially purchased items are considered as cost of goods sold, for the items which are sold first. The value of the ending inventory consists of the recent purchased items.

Last-in-Last-Out:

In Last-in-First-Out method, the costs of last purchased items are considered as the cost of goods sold, for the items which are sold first. The value of the closing stock consists of the initial purchased items.

Cost of goods sold:

Cost of goods sold is the accumulate total of all direct cost incurred in manufacturing the goods or the products which has been sold during a period. Cost of goods sold involves direct material, direct labor, and manufacturing overheads.

Working notes:

Determine the amount of sales revenue:

Salesrevenue=Unitssold×Salesperunit$13,260=510Units×Salesperunit$13,260510Units=SalesperunitSalesperunit=$26 (1)

Determine the goods available for sale for FIFO:

DateParticularsUnits ($)Unit cost ($)Total cost ($)
(a)(b)(c = a × b)
January 1Beginning inventory300113,300
January 12Purchased40012 4,800
Total7008,100
Less: Goods sold500
Ending inventory200

Table (2)

Determine the amount of ending inventory for situation A using FIFO method:

DateParticularsUnitsUnit cost ($)Total cost ($)
(a)(b)(c = a × b)
Purchased200122,400
Ending inventory2002,400

Table (3)

Determine the amount of ending inventory for situation B using LIFO method:

DateParticularsUnitsUnit cost ($)Total cost ($)
(a)(b)(c = a × b)
Purchased200112,200
Ending inventory2002,200

Table (4)

Determine the amount of ending inventory for situation C using FIFO method:

DateParticularsUnitsUnit cost ($)Total cost ($)
(a)(b)(c = a × b)
Purchased200112,200
Ending inventory2002,200

Table (5)

Determine the amount of ending inventory for situation D using LIFO method:

DateParticularsUnitsUnit cost ($)Total cost ($)
(a)(b)(c = a × b)
Purchased200122,400
Ending inventory2002,400

Table (6)

Determine the amount of cost of goods sold for each method:

SituationParticularsUnitsUnit cost ($)Total cost ($)
(a)(b)(c = a × b)
a. FIFOBeginning300113,300
Purchased200122,400
5005,700
b. LIFOBeginning100111,100
Purchased400124,800
5005,900
c. FIFOBeginning300123,600
Purchased200112,200
5005,800
d. LIFOBeginning100121,200
Purchased400114,400
5005,600

Table (7)

Determine the amount of income tax expense for Situation B:

Income tax expenses=30% of Preatx income=30% ×$5,100=$1,530 (2)

Determine the amount of income tax expense for Situation C:

Income tax expenses=30% of Preatx income=30% ×$5,200=$1,560 (3)

Determine the amount of income tax expense for Situation D:

Income tax expenses=30% of Preatx income=30% ×$5,400=$1,620 (4)

2.

To determine

Analyze the relative effects on pretax income and net income, when there is a rise and fall in prices.

2.

Expert Solution
Check Mark

Answer to Problem 5P

The amounts of pretax income when there is rise and fall in prices are compared as below:

Particulars

Situation A

FIFO ($)

Situation B

LIFO ($)

Difference ($)

(AB)

Pretax income when prices are rising5,3005,100200

Situation C

FIFO ($)

Situation D

LIFO ($)

Difference ($)

(DC)

Pretax income when prices are falling5,2005,400200

Table (8)

Explanation of Solution

  • From the above calculation, it is clear that the difference between the pretax tax income between FIFO and LIFO is same. Thus, a difference in inventory has a dollar-for-dollar effect on pretax income.
  • When price rises, the FIFO method gives a higher net income than the LIFO method. On the other hand, when there is a fall in price, the LIFO method gives a higher net income than the FIFO method.

3.

To determine

Analyze the relative effects on the cash position for each situation.

3.

Expert Solution
Check Mark

Explanation of Solution

  • The LIFO method gives most favorable cash position than the FIFO method, when prices are rising. On the other hand, the FIFO method gives most favorable cash position than the LIFO method, when prices are falling. Thus, these cash positions are equal to the difference in income tax.

4.

To determine

Explain the method that is recommended.

4.

Expert Solution
Check Mark

Explanation of Solution

  • Both the LIFO method and FIFO method are equally reasonable in their aspects. For example, when there is a rise in price, the FIFO method produces most favorable results than LIFO by focusing on current income and EPS.
  • On the other hand, when there is a rise in price, the LIFO method also produces most favorable results than FIFO by focusing on income tax expenses and cash position.  Still, these results will reverse when there is a fall in prices.
  • On the income statement, FIFO does not match current expense with current revenues. However it provides a better valuation on the balance sheet. On the other hand, LIFO matches expenses with revenues. However, it provides a less related inventory valuation on the balance sheet.

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Chapter 7 Solutions

FINANCIAL ACCOUNTING (LL)

Ch. 7 - 1. Consider the following information: ending...Ch. 7 - 2. The inventory costing method selected by a...Ch. 7 - 3. Which of the following is not a component of...Ch. 7 - 4. Consider the following information: beginning...Ch. 7 - 5. Consider the following information: beginning...Ch. 7 - 6. An increasing inventory turnover...Ch. 7 - Prob. 7MCQCh. 7 - Which of the following regarding the lower of cost...Ch. 7 - 9. Which inventory method provides a better...Ch. 7 - Which of the following is false regarding a...Ch. 7 - Matching Inventory Items to Type of Business Match...Ch. 7 - Recording the Cost of Purchases for a...Ch. 7 - Identifying the Cost of Inventories for a...Ch. 7 - JCPenney Company, Inc., is a major department...Ch. 7 - M7-5 Matching Financial Statement Effects to...Ch. 7 - M7-6 Matching Inventory Costing Method Choices to...Ch. 7 - M7-7 Reporting Inventory under Lower of Cost or...Ch. 7 - M 7-8 Determining the Effects of Inventory...Ch. 7 - Determining the Financial Statement Effects of...Ch. 7 - Based on its physical count of inventory in its...Ch. 7 - Prob. 2ECh. 7 - Prob. 3ECh. 7 - Abercrombie and Fitch is a leading retailer of...Ch. 7 - Nittany Company uses a periodic inventory system....Ch. 7 - E7-6 Calculating Ending Inventory and Cost of...Ch. 7 - Emily Company uses a periodic inventory system. At...Ch. 7 - Givoly Inc. uses a periodic inventory system. At...Ch. 7 - Evaluating the Choice among Three Alternative...Ch. 7 - Following is partial information for the income...Ch. 7 - Daniel Company uses a periodic inventory system....Ch. 7 - H.T. Tan Company is preparing the annual financial...Ch. 7 - Sanchez Company was formed on January 1 of the...Ch. 7 - Dell Inc. is the leading manufacturer of personal...Ch. 7 - E7-1 5 Analyzing and Interpreting the Effects of...Ch. 7 - The following note was contained in a recent Ford...Ch. 7 - BorgWarner Inc. is a leading global supplier of...Ch. 7 - Several years ago, the financial statements of...Ch. 7 - Analyzing and Interpreting the Impact of an...Ch. 7 - Prob. 20ECh. 7 - E7-21 (Chapter Supplement A) Analyzing the Effects...Ch. 7 - Assume that a retailer’s beginning inventory and...Ch. 7 - Prob. 23ECh. 7 - Travis Company has just completed a physical...Ch. 7 - Prob. 2PCh. 7 - Prob. 3PCh. 7 - Analyzing and Interpreting Income Manipulation...Ch. 7 - Prob. 5PCh. 7 - Jaffa Company prepared its annual financial...Ch. 7 - Evaluating the Effects of Manufacturing Changes on...Ch. 7 - An annual report for International Paper Company...Ch. 7 - The income statement for Pruitt Company summarized...Ch. 7 - P7-1 0 (Chapter Supplement A) Analyzing LIFO and...Ch. 7 - Prob. 1APCh. 7 - Prob. 2APCh. 7 - Prob. 3APCh. 7 - Analyzing and Interpreting the Effects of...Ch. 7 - Evaluating the Choice of Inventory Method When...Ch. 7 - Finding Financial Information Refer to the...Ch. 7 - Prob. 2CPCh. 7 - Refer to the financial statements of American...Ch. 7 - Using Financial Reports: Interpreting the Effect...Ch. 7 - Prob. 5CPCh. 7 - Prob. 6CPCh. 7 - Prob. 7CP
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