Question

Income is to be evaluated under four different situations as follows:

a. Prices are rising:

(1) Situation A: FIFO is used.

(2) Situation B: LIFO is used.

b. Prices are falling:

(1) Situation C: FIFO is used.

(2) Situation D: LIFO is used.

The basic data common to all four situations are: sales, 502 units for $16,064; beginning inventory, 287 units; purchases, 388 units; ending inventory, 173 units; and operating expenses, $3,100. The income tax rate is 30%.

Required:

1. Complete the following tabulation for each situation in Situations A and B (prices rising), assume the following: beginning inventory, 287 units at $11 = $3,157; purchases, 388 units at $12 = $4,656. In Situations C and D (prices falling), assume the opposite; that is, beginning inventory, 287 units at $12 = $3,444; purchases, 388 units at $11 = $4,268.Use periodic inventory procedures.(Round your answers to nearest dollar amount

	prices rising SITUATION A	SITUATION B	prices falling situation A	SITUATION B
SALES REVENUE	$16064	16064	16064	16064
BEGINING INVENTORY	3157
PURCHASES	4656
GOODS AVAILABLE FOR SALE	7813
ENDING INVENTORY	2076
COST OF GOODS SOLD	5737
GROSS PROFIT	10327
EXPENSES	3100	3100	3100	3100
PRETAX INCOME	7227
INCOME TAX EXPENSE	2168
NET INCOME	$5,059

2. Complete the following sentences:

when prices are rising ___________gives a higher net income than ____________

when prices are falling__________effects results.

3. Complete the following sentence:

The relative effects on the cash position for each situation.

when prices are missing,________derives a more favourable cash position than ________the difference in income tax

Answer 1

2.

When prices are rising FIFO method gives a higher net income than LIFO method.

This is because in the FIFO method the product which is purchased first is sold out first which is borne by less cost of production/ sale value and higher inventory value at times of inflation whereas at times of deflation the case is reverse.

Whereas incase of LIFO method the phenomenon gets reverse by less cost of production/sale value at times of deflation and high inventory value and the case gets reversed in inflation times.

when prices are falling LIFO method gives highest net income due to the reasons and effects explained above

3.

When prices are missing LIFO method derives a more favorable cash position than FIFO method without affecting the difference in income tax

This is because the LIFO method has low inventory costs and highest cost of goods. Hence, by decreasing the gross margin and also low tax rate this method is preferred then the latter one without affecting the price missing conflict and the difference in income tax.