Question

Golden Eagle Company began operations on April 1 by selling a single product. Data on purchases and sales for the year are as follows: Purchases: Date April 6 May 18 June 6 July 10 August 10 October 25 November 4 December 10 Units Purchased 31,000 33,000 40,000 40,000 27,200 12,800 8,000 8,000 200,000 Unit Cost $36.60 39.00 39.60 42.00 42.75 43.50 44.85 48.00 Total Cost $1,134,600 1,287,000 1,584,000 1,680,000 1,162,800 556,800 358,800 384,000 $8.148,000 Sales: April May June July August September October November December Total units Total sales 16,000 units 16,000 20,000 24,000 28,000 28,000 18,000 10,000 8,000 168,000 $10,000,000 The president of the company, Connie Kilmer, has asked for your advice on which inventory cost flow method should be used for the 32,000-unit physical inventory that was taken on December 31, using perpetual inventory. Discuss how you would advise Ms. Kilmer about what inventory method to select, based on the data above, comparing and contrasting the LIFO and FIFO inventory cost flow methods and their potential impacts on the company's financial statements.

Answer 1

We chose the inventory method based on what results it generates. Accordingly, we compute the following:

1.

FIFO METHOD
	Receipts			Issues			Balance
Year/Date	Qty	Rate	Amount	Qty	Rate	Amount	Qty	Rate	Amount
Apr 6	31000	36.6	1134600				31000	36.6	1134600
April				16000	36.6	585600	15000	36.6	549000
May 18	33000	39	1287000				15000	36.6	549000
							33000	39	1287000
May				15000	36.6	549000	32000	39	1248000
				1000	39	39000
Jun 6	40000	39.6	1584000				32000	39	1248000
							40000	39.6	1584000
June				20000	39	780000	12000	39	468000
							40000	39.6	1584000
July 10	40000	42	1680000				12000	39	468000
							40000	39.6	1584000
							40000	42	1680000
July				12000	39	468000	28000	39.6	1108800
				12000	39.6	475200	40000	42	1680000
August 10	27200	42.75	1162800				28000	39.6	1108800
							40000	42	1680000
							27200	42.75	1162800
August				28000	39.6	1108800	40000	42	1680000
							27200	42.75	1162800
Sep				28000	42	1176000	12000	42	504000
							27200	42.75	1162800
October 25	12800	43.5	556800				12000	42	504000
							27200	42.75	1162800
							12800	43.5	556800
October				12000	42	504000	21200	42.75	906300
				6000	42.75	256500	12800	43.5	556800
Nov 4	8000	44.85	358800				21200	42.75	906300
							12800	43.5	556800
							8000	44.85	358800
Nov				10000	42.75	427500	11200	42.75	478800
							12800	43.5	556800
							8000	44.85	358800
Dec 10	8000	48	384000				11200	42.75	478800
							12800	43.5	556800
							8000	44.85	358800
							8000	48	384000
Dec				8000	42.75	342000	3200	42.75	136800
							12800	43.5	556800
							8000	44.85	358800
							8000	48	384000
TOTAL	200000		8148000	168000		6711600	32000		1436400

2.

LIFO METHOD Receipts Issues Balance Year/Date Qty Rate Amount Qty Rate Amount Rate Amount Qty y 31000 1134600 Apr 6 36.6 1134600 31000 36.6 April 16000 36.6 585600 15000 36.6 549000 36.6 549000 May 18 33000 39 1287000 15000 33000 39 1287000 549000 May 16000 39 624000 15000 36.6 17000 39 663000 39.6 36.6 | 549000 Jun 6 40000 1584000 15000 17000 39 663000 40000 39.6 1584000 15000 36.6 June 20000 39.6 792000 549000 17000 39 663000 20000 39.6 792000 15000 36.6 549000 July 10 40000 42 1680000 17000 39 663000 20000 39.6 792000 40000 42 1680000 1008000 15000 36.6 549000 July 24000 17000 39 663000 20000 | 39.6 792000 16000 42 672000 August 10 15000 36.6 27200 42.75 549000 1162800 663000 17000 39 20000 39.6 792000 16000 42 672000 27200 42.75 1162800 15000 36.6 27200 42.75 1162800 549000 August 33600 800 42 17000 39 663000 20000 39.6 792000 15200 42 638400 15000 36.6 549000 Sep 15200 42 638400 12800 17000 39 39.6 506880 663000 7200 39.6 285120

7200 39.6 285120 October 25 12800 43.5 556800 15000 36.6 549000 17000 39 663000 7200 39.6 285120 556800 12800 43.5 556800 October 12800 43.5 15000 36.6 549000 663000 5200 39.6 205920 17000 39 2000 39.6 79200 Nov 4 44.85 | 358800 549000 8000 15000 36.6 663000 17000 39 79200 2000 39.6 44.85 | 358800 8000 8000 Nov 44.85 358800 15000 36.6 549000 663000 2000 39.6 79200 17000 39 Dec 10 8000 48 384000 15000 36.6 549000 17000 39 663000 8000 48 384000 Dec 384000 8000 48 15000 36.6 549000 17000 663000 39 8148000| 168000 6936000 32000 1212000 TOTAL 200000

Impact on Financial Statements:

	FIFO	LIFO
Sales (given)	10,000,000	10,000,000
COGS (as computed above)	6,711,600	6,936,000
Profits	3,288,400	3,064,000

Thus based on the above study, we recommend usage of FIFO method as it is one of the widely accepted method (as per accounting standards) and also shows Higher Profits than the other ie, LIFO method. The main reason is that cost of the inventory as been increasing steadily. Thus initially costs were lesser but later they go higher. Thus LIFO which considers the last input's cost price increases COGS.