Question

Givoly Inc. 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				6,000			$	10
For the current year:
Purchase, March 5				18,000				8
Purchase, September 19				9,000				4
Sale ($25 each)				8,800
Sale ($33 each)				15,000
Operating expenses (excluding income tax expense)	$	390,000

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. (Loss amounts should be indicated with a minus sign.)

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. (Loss amounts should be indicated with a minus sign.)    Sales revenue, beginning inventory, purchases, goods avaiable for sale, ending inventory, cost of goods sold, gross profit, operating expenses, pretax income/loss **show work,

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

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

Answer 1

FIFO IS first in first out

Total sales = 8800+15000=23800    (8800sold from beginning and 15000 from March 5 purchase)

cost of goods sold = 6000*$10+ 17800*8

=202,400$

ending inventory = beginning+ purchase - sold

=60000+(18000*8+9000*4) - 202400

=60000+180000-202400

=37600$

Income statement FIFO

sales revenue [8800*25+15000*33]		715000
Beginning inventory	60000
purchases	180000
goods available for sale	240000
ending inventory	(37600)
cost of goods sold [240000-37600]		202400
Gross profit[715000-202400]		512,600
operating expense		-390,000
pretax income /loss		122,600$

2. LIFO last in first out

sales=23800

cost of goods sold=9000*4 + 14800*8   (23800-9000 = 14800sold from march 5 purchase)

=154400$

inventory = 60000+ 180000-154400

=85600$

sales revenue [8800*25+15000*33]		715000
Beginning inventory	60000
purchases	180000
goods available for sale	240000
ending inventory	(85600)
cost of goods sold [240000-37600]		154,400
Gross profit[715000-154400		560,600
operating expense		-390,000
pretax income /loss		170,600$

3. difference

	FIFO	LIFO	difference
pre tax income	122600	170600	48000 [170600-122600]
ending inventory	37600	85600	48000 [85600-37600]

4.Lower income = lower tax

For income tax purpose the inventory method that results in lower profit should be selected in this case FIFO resulted in lower pre tax income than LIFO so FiFO should be selected.