Question

E7-7 (Algo) Analyzing and Interpreting the Financial Statement Effects of LIFO and FIFO LO7-2, 7-3

[The following information applies to the questions displayed below.]

Emily Company 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				2,950			$	14
For the current year:
Purchase, April 11				8,920				15
Purchase, June 1				7,860				20
Sales ($54 each)				10,860
Operating expenses (excluding income tax expense)	$	189,500

E7-7 Part 1

Required:

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.

Cost of goods sold:
not attempted	$41,300selected answer correct	not attempted	not attempted	not attempted
not attempted	124,880selected answer incorrect	not attempted	not attempted	not attempted
not attempted	not attempted	not attempted	not attempted	not attempted
Goods available for sale	166,180		0
not attempted	not attempted	not attempted	not attempted	not attempted
not attempted	not attempted	not attempted	not attempted	not attempted
Cost of goods sold		not attempted		not attempted

2.

E7-7 (Algo) Analyzing and Interpreting the Financial Statement Effects of LIFO and FIFO LO7-2, 7-3

[The following information applies to the questions displayed below.]

Emily Company 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				2,950			$	14
For the current year:
Purchase, April 11				8,920				15
Purchase, June 1				7,860				20
Sales ($54 each)				10,860
Operating expenses (excluding income tax expense)	$	189,500

E7-7 Part 2

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

3.

7-7 (Algo) Analyzing and Interpreting the Financial Statement Effects of LIFO and FIFO LO7-2, 7-3

[The following information applies to the questions displayed below.]

Emily Company 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				2,950			$	14
For the current year:
Purchase, April 11				8,920				15
Purchase, June 1				7,860				20
Sales ($54 each)				10,860
Operating expenses (excluding income tax expense)	$	189,500

E7-7 Part 3

3. Which inventory costing method may be preferred for income tax purposes?

4.

E7-18 (Algo) Analyzing the Effect of an Inventory Error Disclosed in an Actual Note to a Financial Statement LO7-7

Several years ago, the financial statements of Montgomery Greeting Cards, now part of Nation Salutations, contained the following note:

On July 1, the Company announced that it had determined that the inventory . . . had been overstated. . . . The overstatement of inventory . . . was $8,796,000.

Montgomery Greeting Cards reported an incorrect net income amount of $25,872,000 for the year in which the error occurred and the income tax rate was 39.40 percent.

Required:

1. Compute the amount of net income that Montgomery Greeting Cards reported after correcting the inventory error.

Compute the amount of net income that Montgomery Greeting Cards reported after correcting the inventory error.

	Corrected net income

2. Assume that the inventory error was not discovered. Identify the financial statement accounts that would have been incorrect (a) for the year the error occurred and (b) for the subsequent year. State whether each account was understated, overstated, or had no effect.

(a) for the year the error occurred and (b) for the subsequent year. State whether each account was understated, overstated, or had no effect.

	Account Year of Error Subsequent Year Beginning inventory Cost of goods sold Ending inventory Income tax expense Net income Retained earnings Taxes payable

Answer 1

Thank you for your patience. Please give positive ratings so I can keep answering. It would help me a lot. Please comment if you have any query. Thanks!

Emily Company
Workings for FIFO	No. of Units	Cost per unit	Total
Beginning Inventory	2,950.00	14.00	41,300.00
Purchased on April 11	8,920.00	15.00	133,800.00
Purchased on June 11	7,860.00	20.00	157,200.00
Goods available for sale	19,730.00		332,300.00
Cost of Goods sold
From Beginning Inventory	2,950.00	14.00	41,300.00
From Purchases on April 11	7,910.00	15.00	118,650.00
Total Cost of Goods sold	10,860.00		159,950.00
Ending Inventory	8,870.00		172,350.00
Workings for LIFO	No. of Units	Cost per unit	Total
Workings for FIFO	No. of Units	Cost per unit	Total
Beginning Inventory	2,950.00	14.00	41,300.00
Purchased on April 11	8,920.00	15.00	133,800.00
Purchased on June 11	7,860.00	20.00	157,200.00
Goods available for sale	19,730.00		332,300.00
Cost of Goods sold
From units Purchased on June 11	7,860.00	20.00	157,200.00
From units Purchased on Apr 11	3,000.00	15.00	45,000.00
Total Cost of Goods sold	10,860.00		202,200.00
Ending Inventory	8,870.00		130,100.00
Answer 1 a	FIFO
Sales	586,440.00
Less: Cost of goods sold	159,950.00
Gross profit	426,490.00
Less: Operating expense	189,500.00
Pre Tax Income	236,990.00
Answer 1 b	LIFO
Sales	586,440.00
Less: Cost of goods sold	202,200.00
Gross profit	384,240.00
Less: Operating expense	189,500.00
Pre Tax Income	194,740.00
Answer 2	FIFO	LIFO	Difference
Pre Tax Income	236,990.00	194,740.00	42,250.00
Ending Inventory	172,350.00	130,100.00	42,250.00
Answer 3
LIFO is always preferred for income tax purposes.