Question

The following information pertains to the inventory of Parvin Company during Year 2:

Jan. 1	Beginning Inventory	400	units	@	$	30
Apr. 1	Purchased	2,150	units	@	$	35
Oct. 1	Purchased	600	units	@	$	38

During Year 2, Parvin sold 2,900 units of inventory at $90 per unit and incurred $47,000 of operating expenses. Parvin currently uses the FIFO method but is considering a change to LIFO. All transactions are cash transactions. Assume a 30 percent income tax rate. Parvin started the period with cash of $86,000, inventory of $12,000, common stock of $61,000, and retained earnings of $37,000.

Exercise 5-6A Part d

d. Determine the cash flow from operating activities under FIFO and LIFO. (Amounts to be deducted should be indicated with minus sign.)
  

	Fifo	lifo
cash flows from operating activities
cash inflow from customers
cash outflow for inventory
cash outflow for operating expenses
cash outflow for income tax expense
net cash flow from operating activites	$0	$0

Answer 1

d
	FIFO	LIFO
Cash flows from operating activities
Cash inflow from customers	261000	261000
Cash outflow for inventory	-98050	-98050
Cash outflow for operating expenses	-47000	-47000
Cash outflow for income tax expense	-34035	-33435
Net cash flow from operating activities	81915	82515
Workings:
Cash outflow for inventory	98050	=(2150*35)+(600*38)
Sales	261000	=2900*90
Less: Cost of goods sold FIFO	100550	=(400*30)+(2150*35)+(350*38)
Gross margin	160450
Less: Operating expenses	47000
Income before income tax	113450
Income tax paid using FIFO	34035	=113450*30%
Sales	261000
Less: Cost of goods sold LIFO	102550	=(600*38)+(2150*35)+(150*30)
Gross margin	158450
Less: Operating expenses	47000
Income before income tax	111450
Income tax paid using LIFO	33435	=111450*30%

Answer 2

The following information pertains to the inventory of Parvin Company:
 

Jan. 1	Beginning inventory	400	units	@	$	16
Apr. 1	Purchased	2,700	units	@	$	21
Oct. 1	Purchased	900	units	@	$	22

 

During the year, Parvin sold 3,400 units of inventory at $41 per unit and incurred $18,600 of operating expenses. Parvin currently uses the FIFO method but is considering a change to LIFO. All transactions are cash transactions. Assume a 30 percent income tax rate. Parvin started the period with cash of $116,100, inventory of $6,400, common stock of $98,000, and retained earnings of $24,500.

Required

1. Prepare income statements using FIFO and LIFO.

2. Determine the amount of income tax that Parvin would pay using each cost flow method.

3. Determine the cash flow from operating activities under FIFO and LIFO.