Question

Required information [The following information applies to the questions displayed below.] Emily Company uses a periodic inventory system. At the end of the annual accounting period, December 31 of the current year, the accounting records provided the following information for product 2: Units 2,870 Unit Cost $ 12 Inventory, December 31, prior year For the current year: Purchase, April 11 Purchase, June 1 Sales ($55 each) Operating expenses (excluding income tax expense) 8,820 7,920 10,830 13 18 $187,500 Required: 1. Prepare a separate income statement through pretax income that details cost of goods sold for (a) Case A: FIFO and (b) Case B: LIFO.

Answer 1

Income Statement
	Case A		Case B
	FIFO		LIFO
Sales revenue		595650		595650
Cost of goods sold:
Beginning inventory	34440		34440
Purchases	257220		257220
Goods available for sale	291660		291660
Ending inventory	153740		111270
Cost of goods sold		137920		180390
Gross profit		457730		415260
Operating expenses		187500		187500
Pretax income		270230		227760

3

LIFO would be preferred for Income tax purposes.

LIFO has lower pretax income so income tax expense will be lower under LIFO

Workings:
Total units available	19610	=2870+8820+7920
Less: Sales units	10830
Ending inventory units	8780
Ending inventory:
FIFO	153740	=(7920*18)+(8780-7920)*13
LIFO	111270	=(2870*12)+(8780-2870)*13