Question

help please with E7-7

CHAPTER Report E7-7 LO7-2, 7-3 Analyzing and Interpreting the Financial Statement Effects of LIFO and FIFO Broadhead Company uses a periodic inventory system. At the end of the annual accounting period, December 31 of the current year, the accounting records provided the following information for product 2: Units Unit Cost Inventory, December 31. prior year 3,000 $9 For the current year: Purchase, April 11 9,000 10 Purchase, June 1 7,000 Sales ($50 each) 10,000 Operating expenses (excluding income tax expense) $195,000 15 Required: 1. Prepare a separate income statement through pretax income that details cost of goods sold for (a) Case A: FIFO and (b) Case B: LIFO. For each case, show the computation of the ending inven tory and cost of goods sold. (Hint: Set up adjacent columns for each case.) 2. Compare the pretax income and the ending inventory amounts between the two cases. Explain the similarities and differences. 3. Which inventory costing method may be preferred for income tax purposes? Explain.

Answer 1

	Units
Inventory, December 31, prior year	3,000
Purchases - Apirl 11	9,000
Purchases - June 1	7,000
Total units available for sale	19,000
Less: Units sold	10,000
Ending inventory in units	9,000
1)
Case A: FIFO:	Units (a)	Rate (b)	Amount (a*b)
Cost of Goods Sold:
Inventory, December 31, prior year	3,000	$9	$27,000
Purchases - Apirl 11 (10,000 - 3,000)	7,000	$10	$70,000
Cost of Goods Sold under FIFO	10,000		$97,000
Ending Inventory:
Purchases - Apirl 11 (9,000 - 7,000)	2,000	$10	$20,000
Purchases - June 1	7,000	$15	$105,000
Ending Inventory under FIFO	9,000		$125,000
Case B: LIFO:	Units (a)	Rate (b)	Amount (a*b)
Purchases - June 1	7,000	$15	$105,000
Purchases - Apirl 11 (10,000 - 7,000)	3,000	$10	$30,000
Cost of Goods Sold under LIFO	10,000		$135,000
Ending Inventory:
Purchases - Apirl 11 (9,000 - 3,000)	6,000	$10	$60,000
Inventory, December 31, prior year	3,000	$9	$27,000
Ending Inventory under LIFO	9,000		$87,000
Inccome Statement
FIFO
Sales Revenue (10,000 units * $50 each)	$500,000
Less: Cost of Goods Sold under FIFO	($97,000)
Gross Profit	$403,000
Less: Operating expenses	($195,000)
Pretax Income	$208,000
Inccome Statement
LIFO
Sales Revenue (10,000 units * $50 each)	$500,000
Less: Cost of Goods Sold under FIFO	($135,000)
Gross Profit	$365,000
Less: Operating expenses	($195,000)
Pretax Income	$170,000
2) The pretax income is lower under LIFO whereas the pretax income under FIFO is higher which results more income tax burden under FIFO due to high pretax income but the income tax burden under LIFO is lower due to low pretax income. Ending inventory under FIFO is higher compare with ending inventory under LIFO due to selling goods first that were received first under FIFO.
3) LIFO inventory method is preferred for income tax purposes because the pretax income under LIFO shows lower income that results lower income tax expenses.