Question

Pool Corporation, Inc., reported in its recent annual report that "In 2010, our industry experienced some price deflation. . . . In 2011, our industry experienced more normalized price inflation of approximately 3.5% overall despite price deflation for certain chemical products.'' This suggests that in some years Pool’s overall inventory costs rise, and in some years they fall. Furthermore, in many years, the costs of some inventory items rise while others fall. Assume that Pool has only two product items in its inventory this year.

Purchase and sales data are presented below.

	Inventory Item A						Inventory Item B
Transaction	Units			Unit Cost			Units			Unit Cost
Beginning inventory		190		$	7.50			190		$	7.50
Purchases, February 7		230			9.50			230			6.50
Purchases, March 16		250			10.50			250			4.50
Sales, April 28		450						450

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)?

Answer 1

FIFO method states that goods purchased first will be sold first.							Inventory Item A			Item B
LIFO method states that goods purchased later will be sold first							Transaction
							Beginning inventory	190	7.5	190	7.5
Cost of Goods Sold							Purchases, February 7	230	9.5	230	6.5
	A	B	Total				Purchases, March 16	250	10.5	250	4.5
FIFO	3,925	3,055	6,980				Sales, April 28	450		450
LIFO	4,525	2,425	6,950
2
Net Income is higher when cost is lower
FIFO is preferable for A while LIFO for B. Overall, LIFO is preferable
Taxes are lower when cost is higher. Hence, LIFO for A and FIFO for B. Overall,FIFO