AAA Hardware uses the LIFO method to value its inventory. Inventory at the begin
ID: 2592882 • Letter: A
Question
AAA Hardware uses the LIFO method to value its inventory. Inventory at the beginning of the year consisted of 29,000 units of the company’s one product. These units cost $15 each. During the year, 79,000 units were purchased at a cost of $18 each and 83,500 units were sold. Near the end of the fiscal year, management is considering the purchase of an additional 12,000 units at $18.
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?
Explanation / Answer
1 What would be the effect of this purchase on income before income taxes? Under LiFo Method, Cost of goods sold with out Additional purchase Units Price per unit Cost of goods sold Sales in Units 83500 sales from purchase (79000 units 79000 $18 $1422000 Sales from Opening Stock 4500 $15 $67500 Cost of goods sold $1,489,500 Under LiFo Method, Cost of goods sold with Additional purchase Units Price per unit Cost of goods sold Sales in Units 83500 sales from Additional purchase 12000 units 12000 $18 $216000 Sales from Purchases (83500-12000) 71500 $18 $1,287,000 Cost of goods sold $1,503,000 if the additional Purchase made under LIFO method , then the cost of goods sold will increse by $13500 (1503000-1489500), then Profit will decresed by $13500 2 What would be the effect of this purchase on income before income taxes using FIFO method Under LiFo Method, Cost of goods sold with out Additional purchase Units Price per unit Cost of goods sold Sales in Units 83500 Sales from Opening Stock 29000 $15 $435000 sales from purchase (79000-29000) 50000 $18 $900000 Cost of goods sold $1335,000 Under LiFo Method, Cost of goods sold with Additional purchase Units Price per unit Cost of goods sold Sales in Units 83500 Sales from Opening Stock 29000 $15 $435000 sales from purchase (79000-29000) 50000 $18 $900000 Cost of goods sold $1335,000 if the additional Purchase made under LIFO method , then the cost of goods sold Does not change , then No effect on Profit by making additional Purchases