Question

AAA Hardware uses the LIFO method to report its inventory. Inventory at the beginning of the year consisted of 20,000 units of the company’s one product. These units cost $16 each. During the year, 70,000 units were purchased at a cost of $19 each and 71,500 units were sold. Near the end of the fiscal year, management is considering the purchase of an additional 7,500 units at $19.

Required:
1. What would be the effect of this purchase on income before income taxes?
2. What would be the effect of this purchase on income before income taxes using FIFO?
  

Answer 1

The answer has been presented in the supporting sheet. All the parts has been solved with detailed explanation and calculation. For detailed answer refer to the supporting sheet.

Answer 2 Part 1) 3 Cost of goods sold if additional units are not purchases as per LIFO 4 = unit * cost as per LIFO 5 = (70000*19)+(1500*16) 5 = $ 1354000 3 Cost of goods sold if additional units are purchased as per LIFO = = unit * cost as per LIFO 0 = (71500*19) 1 = $ 1358500 since cost of goods sold has increased if additional units are purchased as per LIFO, income before income tax will decrease by $4500 (1358500-1354000) 5 Thus the correct answer 6 Income before income taxes will decrease by $ 4500

18 Part 2) 19 Cost of goods sold if additional units are not purchases as per FIFO 20 = unit * cost as per FIFO 21 = (20000*16)+(51500*19) 22 = $ 1298500 24 Cost of goods sold if additional units are purchased as per FIFO 25 = unit * cost as per FIFO 26 = (20000*16)+(51500*19) 27 = $ 1298500 28 29 Cist cost of goods sold remain same so their will be no impact on net incomebefore income taxes under FIFO 30 31 Thus the correct answer 32 Income before income taxes will remain unchanged in FIFO 33