Question

I need sub-questions E,F,G,H answered.

thank you

E) Name a practical reason for LTM to use LIFO.

F) If LTM were considering a switch from FIFO to LIFO, it would have to be concerned with the LIFO conformity rule. Explain.

G) Assume LTM uses LIFO and the same number of units were sold. Would the company benefit from purchasing 1,000 units at a cost of $40 each on December 31, 2003? Explain.

H) Would your answer to part (g) be the same if LTM used FIFO? Explain.

DO and two negative aspite tech archaeological tools. Informa P9-4 LTM Enterprises is a distributor of high-tech archaeological one of its inventory items for 2003 indicates: Units Cost per Unit Tord. Can 18 5,000 20,000 17,000 2,000 44,000 36 621 768 $1568 1/1 Beginning inventory 2/6 Purchase 7/18 Purchase 10/20 Purchase Goods available for sale - 31, 2003, LTM had 3,000 units of the item on hand. D. sold this product at an average of $60 per unit. and. During 2003.LT 31. 2003, under FIFO, LIFO thod of inventory vale Required: a. Compute the value of the ending inventory at December 31, 2003. and average cost flow assumptions. LTM uses the periodic method of in ation. b. Compute the gross profit generated during 2003 using FIFO and LIFO c. Compute the gross profit percentage generated during 2003 using FIFO and the d. Name a practical reason for LTM to use FIFO. e. Name a practical reason for LTM to use LIFO. f. If LTM were considering a switch from FIFO to LIFO, it would have to be concerned with the LIFO conformity rule. Explain. g. Assume LTM uses LIFO and the same number of units were sold. Would the com- pany benefit from purchasing 1,000 units at a cost of $40 each on December 31, 2003? Explain. h. Would your answer to part (g) be the same if LTM used FIFO? Explain. i. If LTM decides to switch from average cost to FIFO, assuming the cost behavior pat- terns in evidence during the year, would its income be higher or lower than if it had stayed with average cost? Explain. 1. Assume LTM was required to make a lower of cost or market adjustment of 54,00 to its year-end inventory. Prepare journal entries showing two alternative approacum for this write-down. any differences in LTM's income state- k. Would the entries made in part (i) result in any differences in LTM ment for 2003? Explain. 1. If the inventory written down in part 6) increased in value $6,04 should LTM do under generally accepted accounting principles: Exp Startup Soho ased in value $6,000 in 2004, what P9-5

Answer 1

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e. The cost per unit for LTM is increasing with each purchase. Using LIFO will increase the cost of goods sold for the company and reduce net income. This will in turn reduce the tax liability for the company.

f. As per LIFO confirmity rule if a tax payer elects LIFO method of inventory valuation for income tax purposes, then the company must use the same method for accounting purposes as well. However as per GAAP only FIFO or weighted average is allowed and if the company opts for LIFO the financials have to be restated as per FIFO or weighted average.

g. It will benefit the company in terms of lesser taxes paid due to lower net profits.

Calculations:

	Current	If Dec 31, 2003 purchase is made
Ending inventory	90000	120000
	[3000*30]	[4000*30]
Cost of goods sold	1428000	1438000
	[1518000-90000]	[1518000+40000-120000]
Sales	2460000	2460000
	[41000*60]	[41000*60]
Profit	1032000	1022000
	[2460000-1428000]	[2460000-1438000]

h. No, the profit will remain same under FIFO as done below:

	Current	Proposed
Ending inventory	112000	152000
	[2000*38+1000*36]	[2000*38+1000*36+1000*40]
Cost of goods sold	1406000	1406000
	[1518000-112000]	[1518000+40000-152000]
Sales	2460000	2460000
	[41000*60]	[41000*60]
Profit	1054000	1054000
	[2460000-1406000]	[2460000-1406000]