E 9-7
|
|
FIFO |
LIFO |
|
Sales revenue |
$8,000 |
$8,000 |
|
Cost of goods sold |
|
|
|
FIFO = (9 @ $160) + ( 4 @ $160) + (7 @ $170) |
3,270 |
|
|
LIFO = (3 @ $176) + (12 @ $170) + (5 @ $160) |
|
3,368 |
|
Gross profit |
4,730 |
4,632 |
|
Operating expenses |
1,100 |
1,100 |
|
Income before income tax |
$3,630 |
$3,532 |
|
Income tax expense |
|
|
|
FIFO = $3,630 ´ .30 |
$1,089 |
|
|
LIFO = $3,532 ´ .30 |
|
$1,060 |
|
LIFO advantage in tax savings ($1,089 ! $1,060) |
|
$ 29 |
|
Short-cut computation: |
|
|
Inventory difference ($3,368 ! $3,270) |
$ 98 |
|
Income tax rate .. |
´ .30 |
|
LIFO advantage in tax savings . |
$ 29 |
(20-30 min.)
E 9-8a. $64,800 ($101,800
! $37,000)b. $137,300 ($94,100 + $43,200)
c. $24,350 ($25,450 + $93,000
! $94,100)d. $30,200 (Let d = beginning inventory;
d + $54,900
! $22,600 = $62,500d = $30,200)
e. $32,200 ($94,700
! $62,500)g. $37,200 ($84,300
! $47,100)Note: Must solve for g before determining f.
f. $34,700 (Let f = Net purchases;
$10,700 + f
! $8,200 = $37,200f = $34,700)
|
Magnolia Company |
||
|
Income Statement |
||
|
Year Ended December 31, 20XX |
||
|
Net sales |
$84,300 |
|
|
Cost of goods sold: |
||
|
Beginning inventory |
$10,700 |
|
|
Net purchases |
34,700 |
|
|
Cost of goods available |
45,400 |
|
|
Ending inventory |
(8,200 ) |
|
|
Cost of goods sold |
37,200 |
|
|
Gross profit |
47,100 |
|
|
Operating expenses |
31,600 |
|
|
Net income |
$15,500 |
|
(15-20 min.)
E 9-9|
Company |
Gross Profit Percentage |
Inventory Turnover |
||||
|
Maple |
$37,000 |
= |
36.3% |
$64,800 |
= |
4.1 times |
|
$101,800 |
($12,500 + $19,400) / 2 |
|||||
|
Walnut |
$43,200 |
= |
31.5% |
$94,100 |
= |
3.8 times |
|
$137,300 |
($25,450 + $24,350) / 2 |
|||||
|
Pine |
$32,200 |
= |
34.0% |
$62,500 |
= |
2.4 times |
|
$94,700 |
($30,200 + $22,600) / 2 |
|||||
|
Magnolia |
$47,100 |
= |
55.9% |
$37,200 |
= |
3.9 times |
|
$84,300 |
($10,700 + $8,200) / 2 |
|||||
Based on gross profit percentage and rate of inventory turnover, Magnolia Company looks the most profitable.
MEMO
DATE: __________
TO: Investor
FROM: __________
RE: Investment Recommendation
Magnolia Company appears to be the most profitable because it earns the highest percentage of its net sales as gross profit and has almost the fastest rate of inventory turnover. Overall, Magnolia looks like the best investment among the four companies.
E 9-13
LIFO a. Generally associated with saving income taxes.
FIFO b. Results in a cost of ending inventory that is close to the current cost of replacing the inventory.
Specific
unit cost c. Used to account for automobiles, jewelry, and art objects.
Weighted-
average d. Provides a middle-ground measure of ending inventory and cost of goods sold.
FIFO e. Maximizes reported income.
LIFO f. Enables a company to buy high-cost inventory at year end and thereby to decrease reported income.
LIFO g. Reported income and income taxes rise when the company liquidates older, low-cost, layers of inventory.
LIFO h. Matches the most current cost of goods sold against sales revenue.
LIFO i. Results in an old measure of the cost of ending inventory.
(5-10 min.)
E 9-14|
Alcoa Enterprises |
|
|
Income Statement (partial) |
|
|
For the Year Ended December 31, 20X1 |
|
|
Sales revenue |
$225,000 |
|
Cost of goods sold [$113,245 + ($18,028 ! $16,840)] |
114,433 |
|
Gross profit |
$110,567 |
Note: Cost was used for beginning inventory because cost was lower than market. Market (replacement cost) was used for ending inventory because market was lower than cost.
(10 min.)
E 9-15|
Income statement: |
|
|
|
Sales revenue |
|
$112,000 |
|
Cost of goods sold: |
|
|
|
Beginning inventory |
$17,200 |
|
|
Net purchases |
51,700 |
|
|
Cost of goods available for sale |
68,900 |
|
|
Ending inventory |
(19,800) |
|
|
Cost of goods sold |
|
49,100 |
|
Gross profit |
|
$62,900 |
|
|
|
|
|
Balance sheet: |
|
|
|
Inventories at LCM (Cost, $23,800) |
|
$19,800 |
(10-15 min.)
E 9-16|
Lazlo Power Tools |
||||
|
Income Statements |
||||
|
Years Ended September 30, 20X2 and 20X1 |
||||
|
|
20X2 |
20X1 |
||
|
Sales revenue |
|
$137,300 |
|
$121,700 |
|
Cost of goods sold: |
|
|
|
|
|
Beginning inventory |
$10,500 |
|
$12,800 |
|
|
Net purchases |
72,000 |
|
66,000 |
|
|
Cost of goods |
|
|
|
|
|
available |
82,500 |
|
78,800 |
|
|
Ending inventory |
(16,600) |
|
(10,500)* |
|
|
Cost of goods sold |
|
65,900 |
|
68,300 |
|
Gross profit |
|
71,400 |
|
53,400 |
|
Operating expenses |
|
30,300 |
|
26,100 |
|
Net income |
|
$ 41,100 |
|
$ 27,300 |
*$14,000 ! $3,500 = $10,500
Net income for the two years combined is the same in both cases$68,400 (that is, $41,100 + $27,300 = $68,400 = $37,600 + $30,800) because the error in 20X2 counterbalances the error in 20X1.
(10-15 min.)
E 9-17|
Beginning inventory |
|
$47,500 |
|
Net purchases |
|
37,600 |
|
Cost of goods available for sale |
|
85,100 |
|
Cost of goods sold: |
|
|
|
Net sales revenue |
$60,000 |
|
|
Less estimated gross profit of 40% |
(24,000) |
|
|
Estimated cost of goods sold |
|
(36,000) |
|
Estimated cost of inventory destroyed |
|
$49,100 |
Another reason managers use the gross profit method to estimate inventory cost on a regular basis:
To determine ending inventory cost for monthly and quarterly financial statements.