Financial Accounting P6-4A

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P6-4A

The management of Felipe Inc. is reevaluating the appropriations
of using its present inventory cost flow method, which is average-cost.  The company requests your help in determining
the results of operations for 2015 if either the FIFO or the LIFO method had
been used.  For 2015, the accounting
records show these data:

Inventories

Beginning (7,000 units ) 
$14,000

Ending (17,000 units)

Purchase and Sales

Total net sales (180,000 units )  $747,000

Total cost of goods purchased (190,000 units)

Purchases were made quarterly as follows.

Quarter  Units    Unit
Cost  Total Cost

1  50,000      $2.20  $110,000

2    40,000    $2.35  $94,000

3  40,000  $2.50  $100,000

4  60,000  $2.70  $162,000

  Total:
190,000  Total:  $466, 000

 

Operating expenses were $130,000, and the company’s income
tax rate is 40%.

Instructions:

a) 
Prepare comparative condensed income statements
for 2015 under FIFO and LIFO. (show computations of ending inventory)

b) 
Answer…

a. 
Which cost flow method (FIFO or LIFO) produces
the more meaningful inventory amount for the balance sheet?  Why?

b. 
Which cost flow method (FIFO or LIFO) produces
the more meaningful net income?  Why?

c. 
Which cost flow method (FIFO or LIFO) is more
likely to approximate the actual physical flow of goods?  Why?

d. 
How much more cash will be available for
management under LIFO than under FIFO? Why?

Will gross profit under the average cost method
be higher or lower than FIFO?  Than
LIFO?  (not nec

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