Question

The following information pertains to the inventory of Parvin Company:

Jan. 1	Beginning inventory	300	units	@	$	19
Apr. 1	Purchased	2,900	units	@	$	24
Oct. 1	Purchased	1,000	units	@	$	25

During the year, Parvin sold 3,570 units of inventory at $43 per unit and incurred $17,500 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 $211,800, inventory of $5,700, common stock of $194,000, and retained earnings of $23,500.

Required

1. Prepare income statements using FIFO and LIFO.
2. Determine the amount of income tax that Parvin would pay using each cost flow method.
3. Determine the cash flow from operating activities under FIFO and LIFO.

Answer 1

Working Notes:
	FIFO METHDO
			COST OF GOODS AVAILABLE FOR SALE	COST OF GOODS SOLD	CLOSING STOCK
	Date	Particulars	Units	Cost Per unit	Total	Units	Cost Per unit	Cost of Goods Sold	Units	Cost Per unit	Ending inventory
	Jan.01	Beginning Balance	300	$                   19.00	$                  5,700	300	$         19.00	$             5,700
	Apr.01	Purchases	2,900	$                   24.00	$               69,600	2,900	$         24.00	$           69,600
	Oct.01	Purchases	1,000	$                   25.00	$               25,000	370	$         25.00	$             9,250	630	$         25.00	$           15,750
		Total Goods Available For sale	4,200		$             100,300	3,570		$           84,550	630		$           15,750
	LIFO METHDO
			COST OF GOODS AVAILABLE FOR SALE	COST OF GOODS SOLD	CLOSING STOCK
	Date	Particulars	Units	Cost Per unit	Total	Units	Cost Per unit	Cost of Goods Sold	Units	Cost Per unit	Ending inventory
	Jan.01	Beginning Balance	300	$                   19.00	$                  5,700				300	$         19.00	$             5,700
	Apr.01	Purchases	2,900	$                   24.00	$               69,600	2,570	$         24.00	$           61,680	330	$         24.00	$             7,920
	Oct.01	Purchases	1,000	$                   25.00	$               25,000	1,000	$         25.00	$           25,000
		Total Goods Available For sale	4,200		$             100,300	3,570		$           86,680	630		$           13,620
	Solution: A & B
		Caclulation of Income statement and income tax Paid under FIFO & LIFO Method
			FIFO Method	LIFO Method
		Sales (3,570 Units X $ 43)	$              153,510	$              153,510
		Less: Cost of Goods Sold	$                84,550	$                86,680
		Gross Profit	$                68,960	$                66,830
		Operating Expenses	$                17,500	$                17,500
		Net income Before Tax	$                51,460	$                49,330
		Less: Income tax @ 30%	$                15,438	$                14,799
		Net income After Tax	$                36,022	$                34,531
	Solution: C
		Cash Flow From Operating Activities:
			FIFO Method	LIFO Method
		Net Income After Tax	$                36,022	$                34,531
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