Financial Accounting P6-4A

P6-4A

The management of Felipe Inc. is reevaluating the appropriations of using its present inventory cost flow method, which is average-cost. ; The company requests your help in determining the results of operations for 2015 if either the FIFO or the LIFO method had been used. ; For 2015, the accounting records show these data:

Inventories

Beginning (7,000 units ) ; $14,000

Ending (17,000 units)

Purchase and Sales

Total net sales (180,000 units ) ; $747,000

Total cost of goods purchased (190,000 units)

Purchases were made quarterly as follows.

Quarter ; Units ; ; Unit Cost ; Total Cost

1 ; 50,000 ; ; ; $2.20 ; $110,000

2 ; ; 40,000 ; ; $2.35 ; $94,000

3 ; 40,000 ; $2.50 ; $100,000

4 ; 60,000 ; $2.70 ; $162,000

; Total: 190,000 ; Total: ; $466, 000

;

Operating expenses were $130,000, and the company’s income tax rate is 40%.

Instructions:

a) ; Prepare comparative condensed income statements for 2015 under FIFO and LIFO. (show computations of ending inventory)

b) ; Answer…

a. ; Which cost flow method (FIFO or LIFO) produces the more meaningful inventory amount for the balance sheet? ; Why?

b. ; Which cost flow method (FIFO or LIFO) produces the more meaningful net income? ; Why?

c. ; Which cost flow method (FIFO or LIFO) is more likely to approximate the actual physical flow of goods? ; Why?

d. ; How much more cash will be available for management under LIFO than under FIFO? Why?

Will gross profit under the average cost method be higher or lower than FIFO? ; Than LIFO? ; (not nec