Problem 6-4A Inventories Purchases and Sales Quarter Units Unit Cost Total Cost
ID: 2480751 • Letter: P
Question
Problem 6-4A
Inventories
Purchases and Sales
Quarter
Units
Unit Cost
Total Cost
75,000
$153,750
60,000
132,000
60,000
141,000
90,000
229,500
285,000
$656,250
FIFO
LIFO
Problem 6-4A
The management of Felipe Inc. is reevaluating the appropriateness of using its present inventory cost flow method, which is average-cost. The company requests your help in determining the results of operations for 2017 if either the FIFO or the LIFO method had been used. For 2017, the accounting records show these data:Inventories
Purchases and Sales
Beginning (10,500 units) $21,000 Total net sales (270,000 units) $1,120,500 Ending (25,500 units) Total cost of goods purchased (285,000 units) 656,250Purchases were made quarterly as follows.
Quarter
Units
Unit Cost
Total Cost
175,000
$2.05$153,750
260,000
2.20132,000
360,000
2.35141,000
490,000
2.55229,500
285,000
$656,250
Operating expenses were $130,000, and the company’s income tax rate is 40%.
Explanation / Answer
ending inventory for FIFO= 2.55*25500=65025
for LIFO= 21000+(25500-10500)*2.05=51750
(1) The FIFO method produces the most meaningful inventory amount
for the balance sheet because the units are costed at the most
recent purchase prices.
(2) The LIFO method produces the most meaningful net income because
the costs of the most recent purchases are matched against sales.
(3) The FIFO method is most likely to approximate actual physical
flow because the oldest goods are usually sold first to minimize
spoilage and obsolescence.
(4) There will be $5,440 additional cash available under LIFO because
income taxes are $54,060 under LIFO and $59,500 under FIFO.
(5) Gross profit under the average cost method will be: (a) lower than
FIFO and (b) higher than LIFO.