Question

Daniel Company uses a periodic inventory system. Data for the current year: beginning merchandise inventory (ending inventory December 31, prior year), 2,130 units at $35; purchases, 7,800 units at $37; expenses (excluding income taxes), $193,200; ending inventory per physical count at December 31, current year, 1,690 units; sales, 8,240 units; sales price per unit, $76; and average income tax rate, 30 percent.

Required information

Required:

1. Compute cost of goods sold and prepare income statements under the FIFO, LIFO, and average cost inventory costing methods. (Round your final answers to nearest whole dollar. Do not round your intermediate calculations.)

2. Between FIFO and LIFO, which method is preferable in terms of (a) net income and (b) income taxes paid (cash flow)?

3. Between FIFO and LIFO, which method is preferable in terms of (a) net income and (b) income taxes paid (cash flow), assuming that prices were falling?

Answer 1

1. Compoutation of Closing Stock Value and Cost of goods Sold
	FIFO			LIFO			Average
	Qty	$/Unit	Value	Qty	$/Unit	Value	Qty	$/Unit	Value
Opening Stock	2130	35	$74,550	2130	35	$74,550	2130	35	$74,550
Purchase	7800	37	$288,600	7800	37	$288,600	7800	37	$288,600
	9930		$363,150	9930		$363,150	9930		$363,150
Cost of Goods Sold	2130	35	$74,550	7800	$37	$288,600
	6110	37	$226,070	440	35	$15,400	8240	36.571	$301,345
	8240		$300,620	8240		$304,000	8240		$301,345
Closing Stock	1690	37	$62,530	1690	35	$59,150	1690	36.571	$61,805
1. Statement Showing Income Statement
	FIFO		LIFO		Average
Sales	$626,240		$626,240		$626,240
Less: Cost of Goods Sold	$300,620		$304,000		$301,345
Less: Operating Expense	$193,200		$193,200		$193,200
Profit Before Tax	$132,420		$129,040		$131,695
Less: Tax @30%	$39,726		$38,712		$39,509
Profit After Tax	$92,694		$90,328		$92,187
2. (a)Net Income with FIFO method will be reflected more as compare with LIFO, hence it's preferable to follow FIFO.
2(b): Income Tax will be lower as per LIFO Method as compare with FIFO method, Hence it's Preferable to follow LIFO.
3(a), If price were falling then LIFO Method will be preferable for Higher Income .
3(b), Income Tax will be lowere as per FIFO in case of Price were falling as compared to LIFO. Hence FIFO is preferable.