Question

Broadhead Company 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				2,990			$	11
For the current year:
Purchase, April 11				8,810				9
Purchase, June 1				7,820				14
Sales ($60 each)				10,840
Operating expenses (excluding income tax expense)	$	189,000

Required:

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.

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

3. Which inventory costing method may be preferred for income tax purposes? LIFO or FIFO

Answer 1

	Answer =
	CALCULATION OF COST OF ENDING INVENTORY AND COST OF GOODS SOLD UNDER FIFO METHOD
			PURHASES			COST OF GOODS SOLD			CLOSING BALANCE
	Date	Particulars	Units (A)	Rate Per unit	Total Cost	Units (A)	Rate Per unit	Total Cost	Units (A)	Rate Per unit	Total Cost
	1	Beginning inventory	2990	$11	$32,890				2990	$11	$32,890
	2	Purchases April - 11	8810	9	$79,290				2990	$11	$32,890
									8810	$9	$79,290
	3	Purchases June - 1	7820	$14	$1,09,480				2990	$11	$32,890
									8810	$9	$79,290
									7820	$14	$1,09,480
	3	Available For sale	19620		$2,21,660
		Available For sale	19620			2990	$11	$32,890
		Sales	10840			7850	9	$70,650	960	9	$8,640
		Closing Stock	8780						7820	$14	$1,09,480
					Total	10840		103540	8780		118120
			Unit	Amoun
		COGS as per FIFO Method	10840	$1,03,540.00
		Closing Balance as per FIFO	8780	118120
	CALCULATION OF COST OF ENDING INVENTORY AND COST OF GOODS SOLD UNDER LIFO METHOD
			PURHASES			COST OF GOODS SOLD			CLOSING BALANCE
	Date	Particulars	Units (A)	Rate Per unit	Total Cost	Units (A)	Rate Per unit	Total Cost	Units (A)	Rate Per unit	Total Cost
	1	Beginning inventory	2990	$11	$32,890				2990	$11	$32,890
	2	Purchases April - 11	8810	9	$79,290				2990	$11	$32,890
									8810	$9	$79,290
	3	Purchases June - 1	7820	$14	$1,09,480				2990	$11	$32,890
									8810	$9	$79,290
									7820	$14	$1,09,480
	3	Available For sale	19620		$2,21,660
		Available For sale	19620			7820	$14	$1,09,480
		Sales	10840			3020	$9	$27,180	2990	$11	$32,890
		Closing Stock	8780						5790	9	$52,110
					Total	10840		136660	8780		85000
			Unit	Amoun
		COGS as per LIFO Method	10840	$1,36,660.00
		Closing Balance as per LIFO	8780	$85,000.00
		Answer =2
		Answer =
			FIFO	LIFO	Difference
		Sales (10,840 units X $ 60)	$6,50,400.00	$6,50,400.00
		Cost OF Goods Sold	$1,03,540.00	$1,36,660.00
		Gross Profit	$5,46,860.00	$5,13,740.00
		Less : Operating Expenses	$1,89,000.00	$1,89,000.00
		Pre tax Income	$3,57,860.00	$3,24,740.00	$33,120.00
		Closing Stock	FIFO	LIFO	Difference
			$1,18,120.00	$85,000.00	$33,120.00
		Answer =3
		LIFO inventory method is preferred for income tax purpose because under this method
		Pretax income is less and taxation expenses will also came less.
		Preferred for income tax purpose =	LIFO