Question

Problems 9-14 Determining LIFO amounts—comprehensive (LO9-5, LO9-6, LO9-7)

Sirotka Retail Company began doing business in 2015. The following information pertains to its first three years of operation: Use the following links to the present value tables to calculate answers. (PV of 1, PVAD of 1, and PVOA of 1) (Use the appropriate factor(s) from the tables provided.)

			Purchases					Sales
Year	Operating Expenses		Units			Unit Cost			Units			Unit Price
2015	$	60,000		15,000		$	20.00			12,000		$	35
2016		90,000		20,000			25.00			18,000			40
2017		65,000		5,000			30.00			10,000			40

Assume the following:

The income tax rate is 40%.

Purchase and sale prices change only at the beginning of the year.

Sirotka uses the LIFO cost flow assumption.

Operating expenses are primarily selling and administrative expenses.

Required:

Compute cost of goods sold and the cost of ending inventory for each of the three years.

Prepare income statements for each of the three years.

Compute the LIFO reserve at the end of 2015, 2016, and 2017.

Compute the effect of LIFO liquidation on the net income of the company for the years 2016 and 2017.

Compute the inventory turnover ratio for the years 2016 and 2017. Do not make adjustments for any potential biases in LIFO accounting.

How can the physical turnover of inventory (that is, true inventory turnover) best be approximated using all of the information available in a LIFO financial statement? Illustrate your approach by recomputing Sirotka’s inventory turnover ratios for 2016 and 2017.

Compute the gross margin percentages for the years 2016 and 2017.

Provide an estimate of the FIFO cost of goods sold for the years 2015, 2016, and 2017 using the information available in the financial statements.

Based on your answers to requirements 1 and 8, estimate Sirotka’s tax savings for 2015, 2016, and 2017.

Assuming a discount rate of 10%, compute the January 1, 2015, present value of the tax savings over the period 2015–2017 (that is, discount the 2015 tax savings one period, and so on).

Answer 1

Ans:1 (Last in first out)

Particular	2015	2016	2017
Opening Stock (a)	0	3000@$20=$60000	3000*20+2000*25=$110000
Add; Purchase (b)	15000*$20=300000	20000*25=$500000	5000*$30=$150000
Less: Sales (c)	12000*$35=420000	18000*$40=$720000	10000*40=$400000
Closing stock (d)	3000@$20=60000	3000*20+2000*25=$110000	0
Cost of good sold (e)=a+b-d	$240000	$450000	$260000

2 Income Statement

Partcular	2015	2016	2017
Sales	$420000	$720000	$400000
Less:Cost of good sold	$240000	$450000	$260000
Gross Profit	$180000	$270000	$140000
Less; Operating Expenses	$60000	$90000	$65000
Net Profit	$120000	$180000	$75000
Less: Income Tax@40%	$48000	$72000	$30000
Cash in flow	$72000	$108000	$45000

Ans:1 (First in first out)

Particular	2015	2016	2017
Opening Stock (a)	0	3000@$20=$60000	5000*25=$25000
Add; Purchase (b)	15000*$20=300000	20000*25=$500000	5000*$30=$150000
Less: Sales (c)	12000*$35=420000	18000*$40=$720000	10000*40=$400000
Closing stock (d)	3000@$20=60000	5000*25=$25000	0
Cost of good sold (e)=a+b-d	$240000	$535000	$175000

2 Income Statement

Partcular	2015	2016	2017
Sales	$420000	$720000	$400000
Less:Cost of good sold	$240000	$535000	$175000
Gross Profit	$180000	$185000	$225000
Less; Operating Expenses	$60000	$90000	$65000
Net Profit	$120000	$95000	$160000
Less: Income Tax@40%	$48000	$38000	$64000
Cash in flow	$72000	$57000	$96000

Lifo Reserve= Difference in value of closing stock under lifo and fifo mathod

Particular	2015	2016	2017
Ending inventory as per lifo	$60000	$110000	0
Ending Inventory as per fifo	$60000	$25000	0
Lifo Reserve	0	$85000	0

Inventory turnover ratio Lifo : Cost of good sold/ Average Inventory

2016= 450000/110000+60000/2 =5.29

2017 = 260000/110000+0/2=4.72

Gross margin ratio as per lifo mathod = Gross margin/ Sales

2016= 270000/720000=0.375

2017=140000/400000=0.675