Chapter 8: 17Q (page 421)
Explain the following terms.
(a) LIFO layer.
(b) LIFO reserve.
(c) LIFO effect.
LIFO method tackles the different issues. These issues are related to the LIFO layer, LIFO reserve, and LIFO effect.
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Prepare a memorandum containing responses to the following items.
(a) Describe the cost flow assumptions used in average-cost, FIFO, and LIFO methods of inventory valuation.
(b) Distinguish between weighted-average-cost and moving-average-cost for inventory costing purposes.
(c) Identify the effects on both the balance sheet and the income statement of using the LIFO method instead of the FIFOmethod for inventory costing purposes over a substantial time period when purchase prices of inventoriable items arerising. State why these effects take place.
Some of the information found on a detail inventory card for Slatkin Inc. for the first month of operations is as follows.
Received
Issued, Balance,
Date No. of Units Unit Cost No. of Units No. of Units
January 2 1,200 $3.00 1,200
7 700 500
10 600 3.20 1,100
13 500 600
18 1,000 3.30 300 1,300
20 1,100 200
23 1,300 3.40 1,500
26 800 700
28 1,600 3.50 2,300
31 1,300 1,000
Instructions
(a) From these data compute the ending inventory on each of the following bases. Assume that perpetual inventory records are kept in units only. (Carry unit costs to the nearest cent and ending inventory to the nearest dollar.)
(1) First-in, first-out (FIFO).
(2) Last-in, first-out (LIFO).
(3) Average cost.
(b) If the perpetual inventory record is kept in dollars, and costs are computed at the time of each withdrawal, would the amounts shown as ending inventory in (1), (2), and (3) above be the same? Explain and compute. (Round average unit costs to four decimal places.)
Shania Twain Company was formed on December 1, 2016. The following information is available from Twain’s inventory records for Product BAP.
Units Unit Cost
January 1, 2017 (beginning inventory) 600 $ 8.00
Purchases:
January 5, 2017 1,200 9.00
January 25, 2017 1,300 10.00
February 16, 2017 800 11.00
March 26, 2017 600 12.00
A physical inventory on March 31, 2017, shows 1,600 units on hand.
Instructions
Prepare schedules to compute the ending inventory at March 31, 2017, under each of the following inventory methods.
(a) FIFO (b) LIFO. (c) Weighted-average (round unit costs to two decimal places).
Geddes Corporation is a medium-sized manufacturing company with two divisions and three subsidiaries, all located in the United States. The Metallic Division manufactures metal castings for the automotive industry, and the Plastic Division produces small plastic items for electrical products and other uses. The three subsidiaries manufacture various products for other industrial users.
Geddes Corporation plans to change from the lower of first-in, first-out (FIFO)-cost-or market method of inventory valuation to the last-in, first-out (LIFO) method of inventory valuation to obtain tax benefits. To make the method acceptable for tax purposes, the change also will be made for its annual financial statements.
Instructions
(a) Describe the establishment of and subsequent pricing procedures for each of the following LIFO inventory methods.
(1) LIFO applied to units of product when the periodic inventory system is
used.
(2) Application of the dollar-value method to LIFO units of product.
(b) Discuss the specific advantages and disadvantages of using the dollar-value LIFO application as compared to specific goods LIFO (unit LIFO). (Ignore income tax considerations.)
(c) Discuss the general advantages and disadvantages claimed for LIFO methods.
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.
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