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

From the data given in the question , we can observe that the unit cost is increasing every time the purchase is being made.Hence there is inflation in the market.

Now lets consider lifo and fifo in times of inflation

• LIFO income statement in a rising price environment – LIFO method will lower reported margins. Most recent goods are the most expensive and LIFO will calculate higher COGS and thus a lower gross profit.
• LIFO balance sheet in a rising pricing environment – LIFO method lowers the value of inventory and thus the value of short term assets reported on the balance sheet.
• FIFO income statement in a rising price environment – FIFO method will increase reported profit margins. Oldest goods are the least expensive and FIFO will calculate lower COGS and thus a higher gross margin.
• FIFO balance sheet in a rising pricing environment – FIFO method raises the value of inventory, as the least expensive items are taken off the balance sheet first

hence it is advisable to use lifo method in this case to show low profit margin and therfore low taxes.