Question

A company is formed by issuing common stock for $1,000 in cash and then transacts as follows over its first five days of business, with all purchases and sales on credit:

Day 1 - Buys one unit of inventory for $10.

Day 2 - Buys one unit of inventory for $15.

Day 3 - Buys one unit of inventory for $20.

Day 4 - Sells one unit of inventory for $100.

Day 5 - Sells two units of inventory for $100 each.

Prepare in simplified form a balance sheet, assuming that the company uses FIFO and then, alternatively, that it uses LIFO.

Assets: EoD4: FIFO? EoD4 LIFO?

Total Assets: EoD4: FIFO? EoD4 LIFO?

Liabilies and Stockholders Equity: EoD4: FIFO? EoD4 LIFO?

Total Liabilities and Stockholders Equity: EoD4: FIFO? EoD4 LIFO?

Answer 1

I have given balance sheet of both at the end of day 4 and 5 to understand the difference between LIFO and FIFO better.

In FIFO what comes first gets sold first and In LIFO what comes last gets sold first. So there’s difference in reserves in FIFO and LIFO at end of day 4 since all the inventories are not sold but the reserves are same at the end of day 5, since all the inventories are sold.

Balance sheet end of Day 4 (FIFO)

Assets

Inventory                                                                            35

Cash                                                                                      1000

Trade receivables                                                            100

Equity and Liability

Liability                                                                                 45

Stockholders equity                                                        1000

Equity (reserves)                                                             90

Balance sheet end of Day 4 (LIFO)

Assets

Inventory                                                                            25

Cash                                                                                      1000

Trade receivables                                                            100

Equity and Liability

Liability                                                                                 45

Stockholders equity                                                        1000

Equity (reserves)                                                             80

Balance sheet end of Day 5 (FIFO)

Assets

Inventory                                                                            0

Cash                                                                                      1000

Trade receivables                                                            300

Equity and Liability

Liability                                                                                 45

Stockholders equity                                                        1000

Equity (reserves)                                                             255

Balance sheet end of Day 5 (LIFO)

Assets

Inventory                                                                            0

Cash                                                                                      1000

Trade receivables                                                            300

Equity and Liability

Liability                                                                                 45

Stockholders equity                                                        1000

Equity (reserves)                                                             255