Question

Ayayai Inc. is trying to determine whether to use the FIFO or average cost formula. The accounting records show the following selected inventory information: Cost of Goods Sold Units Cost Date Oct. 2 15 Purchases Units Cost Total 9,600 $13 $124,800 16,000 15 240,000 Ending Inventory Total Units Cost Total 9,600 $13 $124,800 [1] [2] [3] [4] [5] [6] 29 21,400 [7] [10] [8] [9] [11] [12] [13] [14] [15] The company accountant has prepared the following partial income statement to help management understand the financial statement impact of each cost determination cost formula. FIFO Average $523,000 $523,000 Sales Cost of goods sold Gross profit Operating expenses Income before income tax Income tax expense (30%) 191,000 191,000

Answer 1

FIFO		Cost of Goods Available for Sale			Cost of Goods Sold			Ending Inventory
		Quantity	Unit Cost	Amount	Quantity	Unit Cost	Amount	Quantity	Unit Cost	Amount
Oct-02	Purchase	9600	$      13.00	$ 124,800				9600	$      13.00	$ 124,800
Oct-15	Purchase	16000	$      15.00	$ 240,000				9600	$      13.00	$ 124,800
								16000	$      15.00	$ 240,000
Oct-29	Sales				9600	$      13.00	$ 124,800
					11800	$      15.00	$ 177,000	4200	$      15.00	$    63,000
					COGS		$ 301,800	Ending Inventory		$    63,000

Average		Cost of Goods Available for Sale			Cost of Goods Sold			Ending Inventory
		Quantity	Unit Cost	Amount	Quantity	Unit Cost	Amount	Quantity	Unit Cost	Amount
Oct-02	Purchase	9600	$      13.00	$ 124,800				9600	$      13.00	$ 124,800
Oct-15	Purchase	16000	$      15.00	$ 240,000				25600	$      14.25	$ 364,800
					21400	$      14.25	$ 304,950	4200	$      14.25	$    59,850
					COGS		$ 304,950	Ending Inventory		$    59,850

	FIFO	Average
Sales	$ 523,000	$ 523,000
Cost of Goods Sold	$ 301,800	$ 304,950
Gross Profit	$ 221,200	$ 218,050
Operating Expenses	$ 191,000	$ 191,000
Income before income tax	$    30,200	$    27,050
Income tax expense (30%)	$      9,060	$      8,115
Net Income	$    21,140	$    18,935

(1) Currently as shown in (a) above, FIFO results in a higher net income than the average cost formula. This is anticipated when the costs are increasing. If instead costs are decreasing, the use of FIFO cost formula will result in lower net income compared to average cost.

If costs remain stable, the two cost formulas will produce same net incomes