Question

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 2,990 $ 14 For the current year: Purchase, April 11 8,980 12 Purchase, June 1 7,990 17 Sales ($57 each) 10,820 Operating expenses (excluding income tax expense) $ 193,500 . Prepare a separate income statement through pretax income that details cost of goods sold for (a) Case A: FIFO and (b) Case B: LIFO. Compute the difference between the pretax income and the ending inventory amount for the two cases.

Answer 1

Ans- BROADHEAD COMPANY

Income Statement

For the Year Ended December 31, Current Year

	Case A		Case B
	FIFO		LIFO
Sales Revenue (10,820 *$57)		616,740		616,740
Cost of Goods sold:
Beginning Inventory (2,990*$14)	41,860		41,860
Purchases April 11 (8,980*$12)	107,760		107,760
Purchases June 1 (7,990 *$17)	135,830		135,830
Cost of Goods Available for sale	285,450		285,450
Less: Ending Inventory
			41,860
Purchases April 11	13,800 (1,150*$12)		73,800 (6,150 *$12)
Purchase June 1	135,830
Cost of Goods Sold		135,820		169,790
Gross Margin		480,920		446,950
Less: Operating Expenses		193,500		193,500
Pre-Tax Earnings		287,420		253,450

working note for ending inventory case 1

Opening inventory	2,990
Add: Purchases on April 11	8,980
Add: Purchases on June 1	7,990
Less: Sales	10,820
Ending Inventory of April 11	1,150
Ending Inventory of June 1	7,990

working note for ending inventory case 2

Opening inventory	2,990
Add: Purchases on April 11	8,980
Add: Purchases on June 1	7,990
Less: Sales	10,820
Remaining opening inventory	2,990
Ending Inventory of April 11	6,150
Ending Inventory of June 1	0

The difference between the pretax income and the ending inventory amount

	FIFO	LIFO	Difference
Pretax Income	287,420	253,450	33,970
Ending Inventory	149,630 (135,830 +13,800)	115,660 (41,860+73,800)	33,970

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