Question

The top executives of PGH Company ask for your help in determining the comparative effects of the FIFO and LIFO inventory cost flow methods.

The accounting records for the year 2020 show the following:

Sold 98,000 units during the year generating total sales revenue of: $750,000

Total Operating Expenses: $124,000

Income Tax Rate is 28% (hint: you must calculate income tax expense)

Beginning Inventory, January 1 (10,000 units) $35,000

Units purchased during the year:

May 10 - 35,000 units at $3.70

August 15 - 60,000 units at $3.90

November 20 - 25,000 units at $4.20

Instructions: Cut and paste questions 1 - 4 in your window and complete the requirements below. Make sure your answers are clearly marked in your solution and show your work in order to receive credit. Add more space as necessary to include your work. Hint: Before you start, calculate number of units available for sale and cost of units available for sale.

1. Calculate Cost of Goods Sold under FIFO and LIFO. Clearly label your answer (as shown below) in your solution and show all supporting work below your answer.

a. FIFO COST OF GOODS SOLD   (fill in answer)

Show all work to support answer here:

b. LIFO COST OF GOODS SOLD                                                   (fill in answer)

Show all work to support answer here:

2. Calculate Ending Inventory under FIFO and LIFO (show all work below)

a. FIFO ENDING INVENTORY                                                        (fill in answer)

Show all work to support answer here:

b. LIFO ENDING INVENTORY                                                         (fill in answer)

Show all work to support answer here:

3. Instructions: Cut and paste this table into your window and complete it as directed here. Prepare comparative condensed income statements for 2020 under FIFO and LIFO using the answers you obtained in [1a] and [1b] and the data provided for PGH Company above.

FIFO		LIFO
Sales	$	Sales	$
Cost of Goods Sold		Cost of Goods Sold
Gross Profit		Gross Profit
Operating Expenses		Operating Expenses
Income before taxes		Income before taxes
Income tax expense		Income tax expense
Net Income		Net Income

4. Answer the following questions:

4a. Which inventory cost flow method produces the ending inventory amount that most closely approximates the amount that would have to be paid to replace the inventory?

      Answer:                                                    

4b. Which inventory cost flow method is most likely to approximate the actual physical flow of the goods?

     

      Answer:                                                    

4c. Which inventory cost flow method produces the net income amount that is more likely an indicator of next period’s net income?

      Answer:                                                    

Answer 1

PGH Company
Answer 1 a and 2 a
Periodic FIFO	No. of Units	Cost per unit	Total
Beginning Inventory	10,000.00		35,000.00
Purchases- May 10	35,000.00	3.70	129,500.00
Purchases- Aug 15	60,000.00	3.90	234,000.00
Purchases- Nov 20	25,000.00	4.20	105,000.00
Goods available for sale	130,000.00		503,500.00
Cost of Goods sold
From Beginning Inventory	10,000.00		35,000.00
From units Purchased- May 10	35,000.00	3.70	129,500.00
From units Purchased- Aug 15	53,000.00	3.90	206,700.00
Total Cost of Goods sold	98,000.00		371,200.00
Ending Inventory	32,000.00		132,300.00
Answer 1 b and 2 b
Periodic LIFO	No. of Units	Cost per unit	Total
Beginning Inventory	10,000.00		35,000.00
Purchases- May 10	35,000.00	3.70	129,500.00
Purchases- Aug 15	60,000.00	3.90	234,000.00
Purchases- Nov 20	25,000.00	4.20	105,000.00
Goods available for sale	130,000.00		503,500.00
Cost of Goods sold
From units Purchased- Nov 20	25,000.00	4.20	105,000.00
From units Purchased- May 10	60,000.00	3.90	234,000.00
From units Purchased- Aug 15	13,000.00	3.70	48,100.00
Total Cost of Goods sold	98,000.00		387,100.00
Ending Inventory	32,000.00		116,400.00
Answer 3	FIFO	LIFO
Sales	750,000.00	750,000.00
Less: Cost of goods sold	371,200.00	387,100.00
Gross Profit	378,800.00	362,900.00
Less: Operating Expense	124,000.00	124,000.00
Income before tax	254,800.00	238,900.00
Less: Tax at 28%	71,344.00	66,892.00
Net Income	183,456.00	172,008.00
Answer 4 a
FIFO
Answer 4 b
FIFO
Answer 4 c
LIFO