Question

Required information The following information applies to the questions displayed below.) Daniel Company uses a periodic inventory system. Data for the current year: beginning merchandise inventory (ending inventory December 31, prior year). 2.000 units at $38; purchases, 8,000 units at $40; expenses (excluding income taxes). $184,500: ending inventory per physical count at December 31, current year, 1,800 units, sales, 8.200 units: sales price per unit, $75, and average income tax rate, 30 percent. 2. Between FIFO and LIFO, which method is preferable in terms of (a) net income and (b) income taxes paid (cash flow)? Net income Income taxes paid

Answer 1

Computing the cost of goods sold for Daniel company:

COST OF GOODS SOLD:	UNITS	FIFO ($)	LIFO ($)	AVERAGE COST ($)
Beginning Inventory @ 38	2000	76000	76000	76000
Purchases @ 40	8000	320000	320000	320000
Goods availbale for Sale	10000	396000	396000	396000
Ending Inventory	1800
Cost of Goods Sold	8200	311600	328000	319800

We need to account for the total goods available for salee (10000 units at a cost of $ 396000). Under FIFO we assign the first cost of $38 to the 8200 units sold. The remaining $1800 ($10000-$8200) is assigned to inventory.

Cost of goods sold under FIFO : 8200 @ 38 = 311600

Now under periodic LIFO we assign the last cost of $40 to the 8200 units sold. Hence the Cost of goods sold under LIFO: 8200 @ 40 = 328000

The Average cost ($38 +$ 40) = $39 the cost of goods sold 8200 @ 39 = 319800.

Ending Inventory Computation:

Under Fifo

	No of Units	Cost Per Unit	Total Cost
Inventory Dec 31 (Prior year)	2000	38	76000
Purchase	8000	40	320000
Total goods available for sale	10000		396000
LESS : Inventory at Dec 31 (Current year)	1800		-84400
Cost of goods sold	8200	38	311600

Under Lifo

	No of Units	Cost Per Unit	Total Cost
Inventory Dec 31 (Prior year)	2000	38	76000
Purchase	8000	40	320000
Total goods available for sale	10000		396000
LESS : Inventory at Dec 31 (Current year)	1800		-68000
Cost of goods sold	8200	40	328000

Under Average

	No of Units	Cost Per Unit	Total Cost
Inventory Dec 31 (Prior year)	2000	38	76000
Purchase	8000	40	320000
Total goods available for sale	10000		396000
LESS : Inventory at Dec 31 (Current year)	1800		-76200
Cost of goods sold	8200	39	319800

Comparison of Cost Flow Assumptions

	FIFO ($)	LIFO ($)	AVERAGE ($)
Sales	75	75	75
Cost of goods sold	38	40	39
Gross profit	37	35	36
Ending Inventory	84400	68000	76200

The example assumes that costs were continually increasing. The results will be differs if costs are decreasing of increasing at a slower rate.

Income Statement

	FIFO ($)	LIFO ($)	AVERAGE COST ($)
Sales Revenue (8200 untis @ 75)	615000	615000	615000
Cost of Goods sold	311600	328000	319800
Gross Profit	303400	287000	295200
Expenses	184500	184500	184500
Pretax Income	118900	102500	110700
Income Tax expenses (30%)	35670	30750	33210
Net Income	83230	71750	77490

Net Income $82320

Income Tax paid $30750

If your inventory costs are going up LIFO costing may be better but higher cost items.

For more accurate cost FIFO is better.