Question

30 of 214 17. Purchase and sales for tw e ntory products we Beginning inventory Purchases, March 16 Sales, April 28 1. Compute cost of goods sold for eac Inventory costing methods Between FIFO and LIFO, which method is preferable in terms Income taxes paid (cash flow)? difference between the Balance Sheet items of Common Stock, Additional Pai zal Surplus), Treasury Stock, and Retained Earnings?

Answer 1

1.

Item A
	FIFO	LIFO
Cost of goods available for sale	1780	1780
Less: Ending inventory	540	400
	[60*9]	[(40*6)+(20*8)]
Cost of goods sold	1240	1380

Item B
	FIFO	LIFO
Cost of goods available for sale	940	940
Less: Ending inventory	180	340
	[60*3]	[(40*6)+(20*5)]
Cost of goods sold	760	600

Workings:

Item A
	Units	Unit cost	Value
Beginning Inventory	40	6	240
Purchases, Feb 7	80	8	640
Purchases, March 16	100	9	900
Cost of goods available for sale	220		1780
Goods sold	160
Ending inventory	60

Item B
	Units	Unit cost	Value
Beginning Inventory	40	6	240
Purchases, Feb 7	80	5	400
Purchases, March 16	100	3	300
Cost of goods available for sale	220		940
Goods sold	160
Ending inventory	60

2.

Situation - Rising prices

In a situation of rising prices, FIFO will result in higher net income and accordingly income taxes paid will be higher.

In a situation of rising prices, LIFO will result in lower net income and accordingly income taxes paid will be lower.

Situation - Falling prices

In a situation of falling prices, FIFO will result in lower net income and accordingly income taxes paid will be lower.

In a situation of rising prices, LIFO will result in higher net income and accordingly income taxes paid will be higher.

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