Chapter 8: 13Q (page 421)
How might a company obtain a price index in order to apply dollar-value LIFO?
The price index is the ratio of ending inventory level at the current price level and base level.
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(FIFO and LIFO) Harrisburg Company is considering changing its inventory valuation method from FIFO to LIFO because of the potential tax savings. However, management wishes to consider all of the effects on the company, including its reported performance, before making the final decision.
The inventory account, currently valued on the FIFO basis, consists of 1,000,000 units at \(8 per unit on January 1, 2017. There are 1,000,000 shares of common stock outstanding as of January 1, 2017, and the cash balance is \)400,000.
The company has made the following forecasts for the period 2017–2019.
2017 | 2018 | 2019 | |
Unit sales (in millions of units) | 1.1 | 1.0 | 1.3 |
Sales price per unit | \(10 | \)12 | \(12 |
Unit purchases (in millions of units) | 1.0 | 1.1 | 1.2 |
Purchase price per unit | \)8 | \(9 | \)10 |
Annual depreciation (in thousands of dollars) | \(300 | \)300 | \(300 |
Cash dividends per share | \)0.15 | \(0.15 | \)0.15 |
Cash payments for additions to and replacement of plant and equipment (in thousands of dollars) | \(350 | \)350 | $350 |
Income tax rate | 40% | 40% | 40% |
Operating expenses (exclusive of depreciation) as a percent of sales | 15% | 15% | 15% |
Common shares outstanding (in millions) | 1 | 1 | 1 |
Instructions
a. Prepare a schedule that illustrates and compares the following data for Harrisburg Company under the FIFO and the LIFO inventory method for 2017–2019. Assume the company would begin LIFO at the beginning of 2017.
Assume all sales are collected in the year of sale and all purchases, operating expenses, and taxes are paid during the year incurred.
b. Using the data above, your answer to (a), and any additional issues you believe need to be considered, prepare a report that recommends whether or not Harrisburg Company should change to the LIFO inventory method. Support your conclusions with appropriate arguments.
Define “cost” as applied to the valuation of inventories.
Colin Davis Machine Company maintains a general ledger account for each class of inventory, debiting such accounts for increases during the period and crediting them for decreases. The transactions below relate to the Raw Materials inventory account, which is debited for materials purchased and credited for materials requisitioned for use.
1. An invoice for \(8,100, terms f.o.b. destination, was received and entered January 2, 2017. The receiving report shows that the materials were received December 28, 2016.
2. Materials costing \)28,000, shipped f.o.b. destination, were not entered by December 31, 2016, “because they were in a railroad car on the company’s siding on that date and had not been unloaded.”
3. Materials costing \(7,300 were returned to the supplier on December 29, 2016, and were shipped f.o.b. shipping point. The return was entered on that date, even though the materials are not expected to reach the supplier’s place of business until January 6, 2017.
4. An invoice for \)7,500, terms f.o.b. shipping point, was received and entered December 30, 2016. The receiving report shows that the materials were received January 4, 2017, and the bill of lading shows that they were shipped January 2, 2017.
5. Materials costing $19,800 were received December 30, 2016, but no entry was made for them because “they were ordered with a specified delivery of no earlier than January 10, 2017.”
Instructions -
Prepare correcting general journal entries required at December 31, 2016, assuming that the books have not been closed.
The board of directors of Ichiro Corporation is considering whether or not it should instruct the accounting department to shift from a first-in, first out (FIFO) basis of pricing inventories to a last-in, first-out (LIFO) basis. The following information is available.
Sales 21,000 units @ \(50
Inventory, January 1 6,000 units @ 20
Purchases 6,000 units @ 22
10,000 units @ 25
7,000 units @ 30
Inventory, December 31 8,000 units @ ?
Operating expenses \)200,000
Instructions
Prepare a condensed income statement for the year on both bases for comparative purposes.
Inventory information for Part 311 of Monique Aaron Corp. discloses the following information for the month of June.
June 1 Balance 300 units @ \(10 June 10 Sold 200 units @ \)24
11 Purchased 800 units @ \(12 15 Sold 500 units @ \)25
20 Purchased 500 units @ \(13 27 Sold 300 units @ \)27
Instructions
(a) Assuming that the periodic inventory method is used, compute the cost of goods sold and ending inventory under(1) LIFO and (2) FIFO.
(b) Assuming that the perpetual inventory method is used and costs are computed at the time of each withdrawal, what is the value of the ending inventory at LIFO?
(c) Assuming that the perpetual inventory method is used and costs are computed at the time of each withdrawal, what is the gross profit if the inventory is valued at FIFO?
(d) Why is it stated that LIFO usually produces a lower gross profit than FIFO?
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