Question

Beck Inc. uses a periodic inventory system. At the end of the annual accounting period, December 31 of the current year, the accounting records provided the following information for product 2:

			Units			Unit Cost
Inventory, December 31, prior year				7,000			$	11
For the current year:
Purchase, March 5				19,000				9
Purchase, September 19				10,000				5
Sale ($28 each)				8,000
Sale ($30 each)				16,000
Operating expenses (excluding income tax expense)	$	400,000

1. Prepare a separate income statement through pretax income that details cost of goods sold for (a) Case A: FIFO and (b) Case B: LIFO. (Loss amounts should be indicated with a minus sign.)

2. Compute the difference between the pretax income and the ending inventory amounts for the two cases.

Answer 1

Calculate Total Sales:-

Sales=(8,000units×$28)+(16,000units×$30)

=$224,000+$480,000

=$704,000

Calculations of Cost of Goods Sold and Ending Inventory under FIFO:-

Date	Total Available	Cost of Goods Sold	Ending Inventory
December 31	(7000units×$11)=$77,000	(7,000units×$11)=$77,000
March 5	(19,000units×$9)=$171,000	(17,000units×$9)=$153,000	(2,000units×$9)=$18,000
September 19	(10,000units×$5)=$50,000		(10,000units×$5=$50,000
Total	$298,000	$230,000	$68,000

Beck Inc.

Income Statement(using FIFO)

For the Year Ended December 31

Accounts	Amount	Amount
Sales	$704,000
Less:- Cost of Goods Sold	($230,000)
Gross Profit		$474,000
Less:- Operating Expenses(excluding income tax expense)		($400,000)
Net Income(pretax)		$74,000

Calculations of Cost of Goods Sold and Ending Inventory Under LIFO:-

Date	Total Available	Cost of Goods Sold	Ending Inventory
December 31	(7,000units×$11)=$77,000		(7,000units×$11=$77,000
March 5	(19,000units×$9)=$171,000	(14,000units×$9)=$126,000	(5,000units×$9=$45,000
September 19	(10,000Units×$5)=$50,000	(10,000units×5)=$50,000
Total	$298,000	$176,000	$122,000

Beck Inc.

Income Statement (using LIFO)

For the Year Ended December 31

Accounts	Amount	Amount
Sales	$704,000
Less:- Cost of Goods Sold	($176,000)
Gross Profit		$528,000
Less:- Operating Expenses (excluding income tax expense)		($400,000)
Net Income(pretax)		$128,000

2. Difference between pretax income of both cases:-

Amount of Difference=(pretax income using LIFO- pretax income using FIFO)

=($128,000-$74,000)

=$54,000

The Difference between the pretax income for the both cases is $54,000.

Difference between Ending Inventory of both cases:-

Amount of Difference=$(Ending Inventory using LIFO- Ending Inventory using FIFO)

=$(122,000-68,000)

=$54,000

The Difference between the Ending Inventory for the both cases is also $54,000.