Question

Question 1:

Kayla Company uses the perpetual inventory system and the LIFO method. The following information is available for the month of June:

June 1		Beginning inventory		200 units @ $5
12		Purchase on account		400 units @ $6
15		Sales on account		440 units
23		Purchase on account		300 units @ $7
27		Sales on account		360 units

The selling price (price the company charged the customers) was $10 per unit.

a) Show the calculation of cost of goods sold and ending inventory under LIFO.

b) What is the amount of Sales Revenue?

c) Prepare a journal entry for the sale of inventory on June 15.

d) In which financial statement does the amount of ending inventory appear?

e) In which financial statement do the amount of sales and amount of cost of goods sold appear?

f) What is the amount of gross margin for month June?

g) What is the gross margin percentage?

Question 2: The controller of Alt Company is applying the lower-of-cost-or-net realizable value basis of valuing its ending inventory. The following information is available:

			Cost			Net Realizable Value
Lawnmowers:
Self-propelled			$14,800			$17,000
Push type			19,000			18,000
Total			33,800			35,000
Snowblowers:
Manual			29,800			31,000
Self-start			19,000			21,000
Total			48,800			52,000
Total inventory			$82,600			$87,000

Compute the value of the ending inventory by applying the lower-of-cost-or-NRV. Show your work.

Question 3: The management of Svetlana Corp. is considering the effects of inventory-costing methods on its financial statements and its income tax expense. Assuming that the price the company pays for inventory is increasing, which method will:

a. Provide the highest net income, LIFO or FIFO?

b. Provide the highest ending inventory, LIFO or FIFO?

c. Result in the lowest income tax expense, LIFO or FIFO?

Answer 1

Question 1

LIFO	Purchases	Cost of Goods Sold	Inventory Balance
Qty	Price	Total	Qty	Price	Total	Qty	Price	Total
1-Jun							200	$           5	$      1,000
12-Jun	400	$           6	$       2,400				200	$           5	$      1,000
							400	$           6	$      2,400
15-Jun				400	$           6	$       2,400	160	$           5	$          800
				40	$           5	$          200
23-Jun	300	$           7	$       2,100				160	$           5	$          800
							300	$           7	$      2,100
27-Jun				300	$           7	$       2,100	100	$           5	$          500
				60	$           5	$          300
30-Jun							100	$           5	$          500
Total			$      4,500			$      5,000

Ans a ) The cost of Goods sold for the month of June is $5000 and the ending inventory is $500 under LIFO method

Ans b ) Sales Revenue = Units Sold * Seeling price / unit

= 800*10

= $ 8,000

Ans c ) Accounts Receivable A/c Dr 4400

To Revenue A/c Cr 4400

Cost of Goods Sold A/c Dr 2600

To Inventory A/c Cr 2600

Ans d ) Closing Inventory Appears on the Asset side of the Balance sheet

Ans e) The Amount of Sales and Cost of Goods Sold appear in the Income Statement

Ans f ) Gross Margin = Sales Revenue- Cost of Goods sold

= 8000-5000

=$ 3,000

And g) Gross Margin % = (Gross Margin / Sales Revenue) *100

= (3000/8000) *100

= 37.5%

Question 2

Valuation of Inventory

Inventory is valued at Cost price or Realisable Value, whichever is less. It is based on the principle of Conservatism or prudence, According to which all anticipated losses should be recorded in the books of accounts, but all anticipated or unrealized gains should be ignored.

Lawn Movers
Self Propelled	14800
Push Type	18000
Total		$ 32,800
Snow Bowlers
Manual	29800
Self-Start	19000
Total		$ 48,800
Total Inventory		$ 81,600

Question 3

Ans a ) FIFO method provides the highest income when the price the company pays for the inventory is increasing. ie. because the Cost of goods sold is first taken for the old goods which will be at a lower cost.

Ans b) LIFO will provide a highest ending inventory (when inventory price is increasing) because the goods will be valued at the last price which it came in.

Ans c ) The LIFO method reflects a higher inventory cost, meaning less profit and less taxes to pay at tax time.