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Chapter 8: Q6BE (page 422)
Question:Data for Amsterdam Company are presented in BE8-4. Compute the April 30 inventory and the April cost of goods sold using the LIFO method.
The ending inventory on April 30 was $4,800 and the cost of goods sold amounts to$7,050.
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The following information relates to the Jimmy Johnson Company.
Ending Inventory Price
Date (End-of-Year Prices) Index
December 31, 2013 $ 70,000 100
December 31, 2014 90,300 105
December 31, 2015 95,120 116
December 31, 2016 105,600 120
December 31, 2017 100,000 125
Instructions
Use the dollar-value LIFO method to compute the ending inventory for Johnson Company for 2013 through 2017.
Presented below is information related to Blowfish radios for the Hootie Company for the month of July.
Units Unit Total Units Selling Total
InCostSoldPrice
Date Transaction
July 1 Balance 100 \(4.10 \) 410
6 Purchase 800 4.20 3,360
7 Sale 300\(7.00 \) 2,100
10 Sale 300 7.30 2,190
12 Purchase 400 4.50 1,800
15 Sale 200 7.40 1,480
18 Purchase 300 4.60 1,380
22 Sale 400 7.40 2,960
25 Purchase 500 4.58 2,290
30 Sale 200 7.50 1,500
Totals 2,100\(9,240 1,400\)10,230
Instructions
(a) Assuming that the periodic inventory method is used, compute the inventory cost at July 31 under each of the following cost flow assumptions.
(1) FIFO.
(2) LIFO.
(3) Weighted-average.
(b) Answer the following questions.
(1) Which of the methods used above will yield the lowest figure for gross profit for the income statement? Explain why.
(2) Which of the methods used above will yield the lowest figure for ending inventory for the balance sheet? Explain why.
The dollar-value LIFO method was adopted by Enya Corp. on January 1, 2017. Its inventory on that date was \(160,000. On December 31, 2017, the inventory at prices existing on that date amounted to \)140,000. Theprice level at January 1, 2017, was 100, and the price level at December 31, 2017, was 112.
Instructions
(a) Compute the amount of the inventory at December 31, 2017, under the dollar-value LIFO method.
(b) On December 31, 2018, the inventory at prices existing on that date was $172,500, and the price level was 115. Computethe inventory on that date under the dollar-value LIFO method.
Question:Matlock Company uses a perpetual inventory system. Its beginning inventory consists of 50 units that cost \(34 each. During June, the company purchased 150 units at \)34 each, returned 6 units for credit, and sold 125 units at $50 each.
Journalize the June transactions.
The following example was provided to encourage the use of the LIFO method. In a nutshell, LIFO subtracts inflation from inventory costs, deducts it from taxable income, and records it in a LIFO reserve account on the books. The LIFO benefit grows as inflation widens the gap between current-year and past-year (minus inflation) inventory costs.
This gap is:
With LIFO Without LIFO
Revenues \(3,200,000 \)3,200,000
Cost of goods sold 2,800,000 2,800,000
Operating expenses 150,000 150,000
Operating income 250,000 250,000
LIFO adjustment 40,000 0
Taxable income \( 210,000 \) 250,000
Income taxes @ 36% \( 75,600 \) 90,000
Cash flow \( 174,400 \) 160,000
Extra cash \( 14,400 0
Increased cash flow 9% 0%
Instructions
(a) Explain what is meant by the LIFO reserve account.
(b) How does LIFO subtract inflation from inventory costs?
(c) Explain how the cash flow of \)174,400 in this example was computed. Explain why this amount may not be correct.
(d) Why does a company that uses LIFO have extra cash? Explain whether this situation will always exist.
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