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Chapter 6: Problem 12

The Molly Company reports ending inventory under the LIFO method of \(\$ 15,000\). Had Molly used FIFO, the ending inventory would have been reported as \(\$ 16,500\). Molly's LIFO inventory reserve is: a. \(\$ 31,500\) b. \(\$ 15,000\) c. \(\$ 1,500\) d. \(91 \%\)

Short Answer

Expert verified
Molly's LIFO inventory reserve is \( \$ 1,500 \), option c.

Step by step solution

01

Understand the Concepts

LIFO stands for 'Last-In, First-Out' and FIFO stands for 'First-In, First-Out.' The LIFO inventory reserve is the difference between the FIFO and LIFO inventory valuations. It reflects the additional profit that would be recorded if the company were using the FIFO method instead of LIFO.
02

Identify Given Values

From the problem, we are given the ending inventory values: - LIFO ending inventory = \( \\( 15,000 \) - FIFO ending inventory = \( \\) 16,500 \).
03

Calculate the LIFO Reserve

The LIFO reserve is calculated by subtracting the LIFO inventory value from the FIFO inventory value: \[ \text{LIFO Reserve} = \text{FIFO Inventory} - \text{LIFO Inventory} \] Substitute the given values: \[ \text{LIFO Reserve} = \\( 16,500 - \\) 15,000 = \$ 1,500 \]
04

Choose the Correct Answer

After calculating the LIFO Reserve as \( \\( 1,500 \), compare it with the given options: a. \( \\) 31,500 \) b. \( \\( 15,000 \) c. \( \\) 1,500 \) d. \( 91\% \) The correct answer is option c, \( \$ 1,500 \).

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

LIFO vs FIFO
LIFO and FIFO are two common methods used to value a company's inventory. LIFO, which stands for "Last-In, First-Out," assumes that the last items added to inventory are the first to be used or sold. This can be useful when prices are rising, as it matches higher recent costs against revenues, potentially lowering taxable income.

In contrast, FIFO, meaning "First-In, First-Out," assumes that the oldest items in the inventory are the first sold. FIFO often better matches the physical flow of goods for businesses where items are perishable.
  • LIFO: Last purchased items are sold first.
  • FIFO: Oldest items in stock are sold first.


Understanding both methods is vital for accurate financial reporting and tax calculation, as they can significantly impact net income and tax obligations.
Inventory Valuation Methods
Inventory valuation methods play a crucial role in financial accounting, affecting the cost of goods sold, net income, and taxes. The most commonly used methods include LIFO, FIFO, and Weighted Average. Each method has its particular impact on the financial statements.

LIFO, FIFO, and the weighted average approach offer different advantages and limitations:
  • LIFO: Lower taxes during inflationary periods but may reduce reported profits.
  • FIFO: Enhances profit reporting with older, often cheaper, inventory but could lead to higher taxes.
  • Weighted Average: Levels out price variances over time, but doesn't always reflect current costs.


Selecting the right method depends on the company's financial strategy and the nature of its inventory.
Financial Accounting Concepts
Financial accounting helps provide insights into a business's economic condition and performance over time. Among the many concepts that it covers, inventory valuation is pivotal, as it directly affects statements such as the balance sheet and income statement.

An essential part of financial accounting is the accurate reporting of inventory. This ensures stakeholders understand the company鈥檚 financial health and make informed decisions.
  • Balance Sheet Impact: Inventory is a current asset, and its valuation affects total assets reported.
  • Income Statement Impact: Cost of Goods Sold (COGS) influences gross margin and net income, which depend on the chosen inventory valuation method.
  • Taxation: Different reported profits due to inventory valuation methods can influence tax liabilities.


A proper understanding of financial accounting and inventory valuation principles is vital for both financial analysis and decision-making.

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Most popular questions from this chapter

Inventory Costing Methods Which inventory costing method requires that a company keep track of the cost of each specific unit of inventory? a. Specific identification b. Lower of cost or market method c. LIFO d. All of the above

Just-in-Time Inventory The Mason Manufacturing Company uses the perpetual inventory system with its raw material inventory. Mason plans to include raw material costing \(\$ 2,700,000\) in the products that it manufactures. John Mason, president of the company, wants to adopt the just-in-time manufacturing philosophy for the raw materials inventory. He wants to have only the raw material needed for the next day's production at the end of each day. The factory operates 300 days each year. Historically, the raw materials inventory balance at the end of the day has averaged \(\$ 40,000\) cost. Mason has an annual inventory carrying cost equal to 20 percent of total inventory cost. Required a. What is the anticipated inventory carrying cost (in dollars) if Mason does not adopt the just-in-time manufacturing philosophy? b. Calculate the average level (in dollars) for the raw materials inventory if Mason adopts the just-in-time manufacturing philosophy. c. Calculate the reductions in the raw materials inventory level and the raw materials inventory annual carrying cost if Mason adopts the just-in-time manufacturing philosophy. d. What other factors or situations should Mason consider before deciding to have only one day's supply of raw material? (Hint: Consider factors and situations related to environment, supplier problems, labor problems, etc.)

Inventory Costing Methods-Periodic Method The Kali Company uses the periodic inventory system for its merchandise inventory. The June 1 inventory for one of the items in the merchandise inventory consisted of 60 units with a unit cost of \(\$ 45\). Transactions for this item during June were as follows: June 5 Purchased 40 units @ \$50 per unit. 13 Sold 50 units @ \(\$ 95\) per unit. 25 Purchased 40 units@ \$53 per unit. 29 Sold20 units@\$110 per unit. Required a. Compute the cost of goods sold and the ending inventory cost for the month of June using the weighted-average cost method. Round the cost per unit to 3 decimal places and round your final answers to the nearest dollar. b. Compute the cost of goods sold and the ending inventory cost for the month of June using the first-in, first-out method. c. Compute the cost of goods sold and the ending inventory cost for the month of June using the last-in, first-out method.

Just-in-Time Inventories Nevada Manufacturing Company uses the perpetual inventory system and plans to use raw material costing \(\$ 2,100,000\) in making its products. Nevada will operate its factory 300 days during the year. Currently, Nevada follows the just-in-case philosophy with its raw materials inventory, keeping raw materials costing \(\$ 20,000\) in its raw materials inventory. Nevada plans to switch to the just-in-time manufacturing philosophy by keeping only the raw materials needed for the next two days of production. Calculate the new raw materials inventory level after Nevada implements the just-in-time manufacturing philosophy.

Inventory Costing Methods-Periodic Method Tally Stores uses the periodic inventory system for its merchandise inventory. The April 1 inventory for one of the items in the merchandise inventory consisted of 120 units with a unit cost of \(\$ 330\). Transactions for this item during April were as follows: April 9 Purchased 40 units @ \(\$ 345\) per unit. 14 Sold 80 units @ \$550 per unit. 23 Purchased 20 units @ \(\$ 360\) per unit. 29 Sold 40 units@ \(\$ 550\) per unit. Required a. Calculate the cost of goods sold and the ending inventory cost for the month of April using the weighted-average cost method. Round the cost per unit to 3 decimal places and your final answers to the nearest dollar. b. Calculate the cost of goods sold and the ending inventory cost for the month of April using the first-in, first-out method. c. Calculate the cost of goods sold and the ending inventory cost for the month of April using the last-in, first-out method.
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