# FIFO and LIFO Assessment

For this assessment, complete Problems 1 and 2. You may use Word or Excel to complete the assessments throughout this course, but you will find Excel to be most helpful for creating spreadsheets. Tutorials for using Excel are provided in the Supplemental Resources in the left navigation menu. If you use Excel, submit the assessment in one Excel document, using separate tabs for each spreadsheet.

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To complete the first problem, you may choose to use the Assessment 6, Problem 1 Template linked in the Suggested Resources under the Capella Resources heading.

#### Problem 1: The Effects of Different Cost Flow Assumptions for Inventory

At the end of January 2011, the records of Sheldon and Blair showed the following for a particular item that sold at \$20 per unit:

Problem 1, Table 1: Records of Sheldon and Blair
Transactions Units Total Amount
Inventory, January 1, 2011 500 @ \$6.00 \$3,000
Purchase, January 12 600 @ \$7.00 \$4,200
Purchase, January 26 200 @ \$7.10 \$1,420
Sale (400 units sold for \$20 each)
Sale (300 units sold for \$20 each)

Based on the information provided in the table above, complete the following. An optional template, Assessment 6, Problem 1 Template, is provided in the Suggested Resources under the Capella Resources heading.

1. Assuming the use of a periodic inventory system, prepare a summarized income statement through gross profit for the month of January under each method of inventory listed below. Show the inventory computations for each method in detail.
• a. Average cost. (Round the average cost per unit to the nearest cent.)
• b. First in, first out (FIFO).
• c. Last in, first out (LIFO).
• d. Specific identification. (Assume that the first sale was selected from the beginning inventory and the second sale was selected from the January 12 purchase.)
2. Of FIFO and LIFO, which method would result in the higher pretax income? Which would result in the higher EPS?
3. Of FIFO and LIFO, which method would result in the lower income tax expense? Explain, assuming a 35 percent average tax rate.
4. Of FIFO and LIFO, which method would produce the more favorable cash flow? Explain.

#### Problem 2: The Effects of Differing Depreciation Methods

Total Workout, Inc. purchased three ï¬ï¿½tness machines from Ace Used Equipment at the beginning of the year. All three were used machines that had to be overhauled and installed before they were put into use. The costs of the machines and their renovation and installation are shown in Table 1 below:

Problem 2, Table 1: Equipment Costs
Account Machine A Machine B Machine C
Amount paid for asset \$21,000 \$30,750 \$8,000
Installation cost \$500 \$1,000 \$200
Renovation costs prior to use \$2,000 \$1,000 \$1,500

By the end of the first year, each machine had been operating 4,800 hours. Depreciation estimates are shown in Table 2 below:

Problem 2, Table 2: Equipment Depreciation
Machine Life Residual Value Depreciation Method
A 5 years \$1,000 Straight-line
B 60,000 hours \$2,000 Units-of-production
C 4 years \$1,500 Double-declining balance

Using the data provided above, complete the following:

1. Compute the cost of each machine.
2. Give the entry to record depreciation expense at the end of the first year, using all three depreciation methods listed in Table 2.