Question

Аавьса. Аавьсах Аавьс. Аавьсс Аав Аавьсс. Аавьсас T Normal No Spaci.. Heading 1 Heading 2 Title Subtitle Subtle Em Font P aragraph Styles Case 1. Duracraft Corporation is nearing the end of its first year of operations. Duracraft made inventory purchases of $745,000 during the year, as follows: • • . • January 1,000 units @ $100.00 $100,000 July 4,000 units @ $121.25 = $485,000 November 1,000 units @ $160.00 = $160,000 Totals 6,000 units = $745,000 Sales for the year are 5,000 units for $1,200,000 of revenue. Expenses other than cost of goods sold and income taxes total $200,000. The president of the company is undecided about whether to adopt the FIFO method or the LIFO method for inventories. The income tax rate is 40%. Requirements 1. To aid company decision making, prepare income statements under FIFO and under LIFO. 2. Compare the net income under FIFO with net income under LIFO. Which method produces the higher net income? What causes this difference? Be specific Case 2. The inventory costing method a company chooses can affect the financial statements and thus the decisions of the people who use those statements. Requirements 1. Company A uses the LIFO inventory method and discloses its use of the LIFO method in notes to the financial statements. Company B uses the FIFO method to account for its inventory. Company B does not disclose which inventory method it uses. Company B reports a higher net income than Company A. In which company would you prefer to invest? Give your reason(s). 2. Representational faithfulness is an accepted accounting concept. Would you want management to be faithful in representing its accounting for inventory if you here to search

Answer 1

CASE I : Income Statements under FIFO & LIFO

Income Statement			FIFO Method	LIFO Method
Sales			$ 12,00,000	$ 12,00,000
Cost of goods sold			$ 5,85,000	$ 6,45,000
Gross profit			$ 6,15,000	$ 5,55,000
Other Expenses			$ 2,00,000	$ 2,00,000
Net Income			$ 4,15,000	$ 3,55,000

Cost of Goods Sold Under FIFO Method					Cost of Goods Sold Under LIFO Method
January	1000	$ 100	$ 1,00,000		November	1000	$ 160	$ 1,60,000
July	4000	$ 121.25	$ 4,85,000		July	4000	$ 121.25	$ 4,85,000
	5000		$ 5,85,000			5000		$ 6,45,000

the FIFO Method shows high profit than LIFO Method the difference is 1000*($160-$100)= $60,000

due to the cost of goods purchased in November is costlier than goods purchased in January.

CASE II :

In this case companies are following different methods of valuation. so it was not proper to choose Company B to invest funds by which it showing high profits compared to company A

further Company A disclosing properly the method followed in the books of accounts where Company B is not Disclosing properly

By analyzing above fact prefer to invest in Company A Because it is showing accounts in True & Fair manner as compared to Company B