Question

The following information pertains to the inventory of Parvin Company for Year 3:

Jan. 1	Beginning inventory	300	units	@	$	18
Apr. 1	Purchased	2,600	units	@	$	23
Oct. 1	Purchased	900	units	@	$	24

During Year 3, Parvin sold 3,230 units of inventory at $44 per unit and incurred $18,900 of operating expenses. Parvin currently uses the FIFO method but is considering a change to LIFO. All transactions are cash transactions. Assume a 30 percent income tax rate. Parvin started the period with cash of $150,100, inventory of $5,400, common stock of $132,000, and retained earnings of $23,500.

a. Prepare income statements using FIFO and LIFO. (Round intermediate calculations and final answers to the nearest whole dollar amount.)

b. Determine the amount of income tax that Parvin would pay using each cost flow method.

c. Determine the cash flow from operating activities under FIFO and LIFO. (Round intermediate calculations and final answers to the nearest whole dollar amount. Amounts to be deducted should be indicated with minus sign.)

Answer 1

a) Income Statement as per FIFO & LIFO

PARVIN COMPANY
Income Statement
For the Year 3
Particulars	As per FIFO	As per LIFO
Net Sales	$             142,560	$     142,560
Cost of goods sold	$              -73,360	$     -75,420
Gross Margin	$                69,200	$       67,140
Operating Expenses	$              -18,900	$     -18,900
Income before tax	$                50,300	$       48,240
Income Tax @ 30%	$              -15,090	$     -14,472
Income after tax	$                35,210	$       33,768

b)

Valuation Method	Income Tax Amount ($)
FIFO	15,090
LIFO	14,472

c)

PARVIN COMPANY
Statement of Cash Flows
For the Year 3
Particulars	FIFO	LIFO
Cash Flows from Operating Activities
Net Income	$   35,210.00	$   33,768.00
Less	Increase in Inventory	$   -8,040.00	$   -5,980.00
Cash Flow from Operating Activities	$   27,170.00	$   27,788.00

Workings

FIFO
	Purchases	Cost of Goods Sold	Inventory
		Unit	Total		Unit	Total		Unit	Total
Date	Qty	Cost	Cost	Qty	Cost	Cost	Qty	Cost	Cost
01-Jan	300	18	5400				300	18	5400
01-Apr	2600	23	59800				300	18	5400
							2600	23	59800
01-Oct	900	24	21600				300	18	5400
							2600	23	59800
							900	24	21600
Sales				300	18	5400	560	24	13440
				2600	23	59800
				340	24	8160
LIFO
	Purchases	Cost of Goods Sold	Inventory
		Unit	Total		Unit	Total		Unit	Total
Date	Qty	Cost	Cost	Qty	Cost	Cost	Qty	Cost	Cost
01-Jan	300	18	5400				300	18	5400
01-Apr	2600	23	59800				300	18	5400
							2600	23	59800
01-Oct	900	24	21600				300	18	5400
							2600	23	59800
							900	24	21600
Sales				900	24	21600	300	18	5400
				2340	23	53820	260	23	5980