AAA Hardware uses the LIFO method to value its inventory. Inventory at the begin
ID: 2341313 • Letter: A
Question
AAA Hardware uses the LIFO method to value its inventory. Inventory at the beginning of the year consisted of 23,000 units of the company's one product. These units cost $14 each. During the year, 73,000 units were purchased at a cost of $17 each and 80,500 units were sold. Near the end of the fiscal year, management is considering the purchase of an additional 9,000 units at $17. Required 1. What would be the effect of this purchase on income before income taxes? 2. What would be the effect of this purchase on income before income taxes using FIFO method? 1. Income before income taxes would be 2. Income before income taxes would be: wer o effectExplanation / Answer
Answer
>If Ending Inventory is over valued, Cost of Goods Sold will be lower, Hence Gross Profits will be higher. This will result in higher Net Income and Higher Income Taxes.
>If Ending Inventory is under valued, Cost of Goods will be higher, hence Gross Profits will be lower. This will result in Lower Net Income and Lower Income taxes.
Workings---
>Ending Inventory and Cost of Goods Sold if the last purchase IS NOT MADE
LIFO
Cost of Goods available for sale
Cost of Goods Sold
Ending Inventory
Units
Cost/unit
COG for sale
Units sold
Cost/unit
COGS
Units
Cost/unit
Ending inventory
Beginning Inventory
23000
$ 14.00
$ 322,000.00
7500
$ 14.00
$ 105,000.00
15500
$ 14.00
$ 217,000.00
Purchase #1
73000
$ 17.00
$ 1,241,000.00
73000
$ 17.00
$ 1,241,000.00
0
$ 17.00
$ -
TOTAL
96000
$ 1,563,000.00
80500
$ 1,346,000.00
15500
$ 217,000.00
--Above shows that Ending Inventory will be $ 217,000
>Ending Inventory and Cost of Goods Sold if the last purchase IS MADE.
LIFO
Cost of Goods available for sale
Cost of Goods Sold
Ending Inventory
Units
Cost/unit
COG for sale
Units sold
Cost/unit
COGS
Units
Cost/unit
Ending inventory
Beginning Inventory
23000
$ 14.00
$ 322,000.00
$ 14.00
$ -
23000
$ 14.00
$ 322,000.00
Purchase #1
73000
$ 17.00
$ 1,241,000.00
71500
$ 17.00
$ 1,215,500.00
1500
$ 17.00
$ 25,500.00
Purchase #2
9000
$ 17.00
$ 153,000.00
9000
$ 17.00
$ 153,000.00
0
$ 17.00
$ -
TOTAL
105000
$ 1,716,000.00
80500
$ 1,368,500.00
24500
$ 347,500.00
--Above shows that Ending Inventory will be $ 347,500
Ending Inventory has increased from $ 217,000 to $ 347,500 (by $ 130,500)
Answer: Income before Income taxes would be $ 130,500 HIGHER [because Ending Inventory value has increased]
Workings---
>Ending Inventory and Cost of Goods Sold if the last purchase IS NOT MADE
FIFO
Cost of Goods available for sale
Cost of Goods Sold
Ending Inventory
Units
Cost/unit
COG for sale
Units sold
Cost/unit
COGS
Units
Cost/unit
Ending inventory
Beginning Inventory
23000
$ 14.00
$ 322,000.00
23000
$ 14.00
$ 322,000.00
0
$ 14.00
$ -
Purchase #1
73000
$ 17.00
$ 1,241,000.00
57500
$ 17.00
$ 977,500.00
15500
$ 17.00
$ 263,500.00
TOTAL
96000
$ 1,563,000.00
80500
$ 1,299,500.00
15500
$ 263,500.00
--Above shows that Ending Inventory will be $ 263,500
FIFO
Cost of Goods available for sale
Cost of Goods Sold
Ending Inventory
Units
Cost/unit
COG for sale
Units sold
Cost/unit
COGS
Units
Cost/unit
Ending inventory
Beginning Inventory
23000
$ 14.00
$ 322,000.00
23000
$ 14.00
$ 322,000.00
0
$ 14.00
$ -
Purchase #1
73000
$ 17.00
$ 1,241,000.00
57500
$ 17.00
$ 977,500.00
15500
$ 17.00
$ 263,500.00
Purchase #2
9000
$ 17.00
$ 153,000.00
0
$ 17.00
$ -
9000
$ 17.00
$ 153,000.00
TOTAL
105000
$ 1,716,000.00
80500
$ 1,299,500.00
24500
$ 416,500.00
--Above shows that Ending Inventory will be $ 416,500
Ending Inventory has increased from $ 263,500 to $ 416,500 (by $ 153,000)
Answer: Income before Income taxes would be $ 153,000 HIGHER [because Ending Inventory value has increased]
LIFO
Cost of Goods available for sale
Cost of Goods Sold
Ending Inventory
Units
Cost/unit
COG for sale
Units sold
Cost/unit
COGS
Units
Cost/unit
Ending inventory
Beginning Inventory
23000
$ 14.00
$ 322,000.00
7500
$ 14.00
$ 105,000.00
15500
$ 14.00
$ 217,000.00
Purchase #1
73000
$ 17.00
$ 1,241,000.00
73000
$ 17.00
$ 1,241,000.00
0
$ 17.00
$ -
TOTAL
96000
$ 1,563,000.00
80500
$ 1,346,000.00
15500
$ 217,000.00