Question

At the beginning of 2018, Morley & Company had 560 units in inventory that were purchased at the following prices. Year purchased Units Cost per unit 2014 120 $100 2015 140 $110 2016 140 $115 2017 160 $120 During 2018 Morley was on strike, but the company sold 440 units of its products out of inventory. The cost that Morley would have incurred in manufacturing additional units during 2018 was $125. Assume the company uses the LIFO method for valuing inventories. The impact on 2018 pretax income of the decrease in inventory was:

Answer 1

Last in, first out (LIFO) is a method used to account for inventory that records the most recently produced items as sold first. Under LIFO, the cost of the most recent products purchased (or produced) are the first to be expensed as cost of goods sold (COGS)—which means the lower cost of older products will be reported as inventory.

In the given case scenario the company has sold 440 units out of its 560 units leaving 120 units as closing inventory.

As per the LIFO method the units purchased most recently will account for cost of goods sold.That means all the units purchased in 2015 or after will account for cost of goods sold as 120 units in closing inventory will be from the units purchased in 2014 as per LIFO method. It does not matter what would have cost of goods if they would have been purchased in the current year that means we will ignore cost per unit of $125 for our calculations.

Computation of cost of goods or reduction in inventory sold:

Year	Units	Cost per unit	Cost
2015	140	$110	$15,400
2016	140	$115	$16,100
2017	160	$120	$19,200
Total	440		$50,700

Therefore, reduction in inventory will be by $50,700 as company follows LIFO method.