Question

The board of directors of Sarasota Corporation is considering whether or not it should instruct the accounting department to shift from a first-in, first-out (FIFO) basis of pricing inventories to a last-in, first-out (LIFO) basis. The following information is available.

Sales		20,900	units @	$51
Inventory, January 1		5,700	units @	20
Purchases		6,200	units @	22
		10,500	units @	25
		7,100	units @	30
Inventory, December 31		8,600	units @	?
Operating expenses		$202,000

Prepare a condensed income statement for the year on both bases for comparative purposes.

Answer 1

	First-in, first-out							Last-in, first-out
Sales revenue		$1,065,900									$1,065,900
Cost of goods sold:
Inventory, Jan. 1	$114,000							$114,000
Purchases	611,900*									611,900
Cost of goods available	725,900							725,900
Inventory, Dec. 31	(250,500**)								(177,800***)
Cost of goods sold		475,400									548,100
Gross profit		590,500									517,800
Operating expenses		202,000									202,000
Net income		$ 388,500									$   315,800

*Purchases
6,200 @ $22 =	$136,400
10,500 @ $25 =	262,500
7,100 @ $30 =	213,000
	$611,900
**Computation of inventory, Dec. 31:
First-in, first-out:
7,100 units @ $30 =	$213,000
1,500 units @ $25 =	37,500
	$250,500
***Last-in, first-out:
5,700 units @ $20 =	$114,000
2,900 units @ $22 =	63,800
	$177,800