Question

Denise’s Boutique uses the perpetual inventory method for its wristlet purses. following inventory information for October:

It has provided the

Oct. 1 On hand, 40 units @ $20 each $800

Oct 8 Purchased 200 units @$21 each $4,200

Oct. 14. Sold 190 units @ $50 each $9,500

Oct. 19 Purchased 100 units @ $27 each. $2700

Oct. 28 Sold 120 units @ $50 each $6,000

Denise’s Boutique has a 30% effective income tax rate.

A. How much is the cost of ending inventory at October 31 and the cost of goods sold for October using FIFO?

B.How much is the cost of ending inventory at October 31 and the cost of goods sold for October using LIFO?

C. How much will Denise’s Boutique save in income taxes if it uses LIFO?

D. Calculate Denise’s Boutique’s inventory-on-hand period under both LIFO and FIFO. Which method generates the ‘better’ inventory-on-hand’ ratio?

Answer 1

Question A

Using FIFO Method

	Goods		Purchased	Cost	of	Goods Sold	Ending	Inventory	Balance
Particulars / Date	Units	Unit Rate	Total Amount	Units	Unit Rate	Total Amount	Units	Unit Rate	Total Amount
Oct 1 / Beginning Inventory							40	20	800
Oct 08 / Purchases	200	21	4,200				40	20	800
							200	21	4,200
Oct 14/ Sales				40	20	800	50	21	1,050
				150	21	3,150
Oct 19/ Purchases	100	27	2,700				50	21	1,050
							100	27	2,700
Oct 28 / Sales				50	21	1,050	30	27	810
				70	27	1,890
Total Purchased	300		6,900
Total Cost of Goods Sold				310		6,890
Ending Inventory at Oct 31							30		810

Question B

Using LIFO Method

Particulars / Date	Units	Unit Rate	Total Amount	Units	Unit Rate	Total Amount	Units	Unit Rate	Total Amount
Oct 1 / Beginning Inventory							40	20	800
Oct 08 / Purchases	200	21	4,200				40	20	800
							200	21	4,200
Oct 14/ Sales				40	20	800	50	21	1,050
				150	21	3,150
Oct 19 / Purchases	100	27	2,700				50	21	1,050
							100	27	2,700
Oct 28 / Sales				100	27	2,700	30	21	630
				20	21	420
Total Purchases	300		6,900
Total Cost of Goods Sold				310		7,070
Ending Inventory at Oct 31							30		630

Question C

Saving in Taxes in Using LIFO = Taxes as per FIFO - Taxes as per LIFO

= 2,583 - 2,529

= $ 54

NOTES

Particulars	FIFO	LIFI
Sales Revenue	15,500	15,500
Less : Cost of Goods Sold	(6,890)	(7,070)
Gross Profit	8,610	8,430
Less: Income Tax	(2,583)	(2,529)
(Income Tax = 30% of Gross Profit)
Net Income	6,027	5,901

Question D

Inventory on Hand Ratio

Particulars	FIFO	LIFO
Cost of Goods Sold	6,890	7,070
÷ Average Inventory	805	715
Inventory on Hand Ratio	8.56 Times	9.89 Times

With LIFO Inventory on Hand Ratio is Better.

Average Inventory = (Inventory as on Oct 01 + Inventory as on Oct 31) / 2

For FIFO = (800 + 810) / 2 = $ 805

For LIFO = (800 + 630) /2 = $ 715

Inventory on Hand Period

Particular	FIFO	LIFO
Number of Days	365	365
÷ Inventory on Hand Ratio	8.56	9.89
Inventory on Hand Period	42.65 Days	36.91 Days