Question

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.

Short answer

The net income under the FIFO method is higher by $71,000.

Step-by-step solution

Ending inventory and Income statement under FIFO

Value of ending inventory

	Units	Cost per unit	Amount
	7000	$30	$210,000
	1000	$25	$25,000
Total	8,000		$235,000

$\begin{array}{rcl}\mathrm{Ending}\mathrm{inventory}\mathrm{per}\mathrm{unit}\mathrm{cost}& =& \frac{\mathrm{Ending}\mathrm{inventory}\mathrm{value}}{\mathrm{Ending}\mathrm{inventory}\mathrm{units}}\\ & =& \frac{235,000}{8,000}\\ & =& 29.375\end{array}$

Condensed Income Statement

Particular		Amount
Sales		$1,050,000
Cost of goods sold:
Opening Stock	$120,000
Add: Purchases	$592,000
Less: Closing stock	$235,000	$477,000
Gross Profit		$573,000
Less: Operating Expenses		$200,000
Net Income		$373,000

Ending inventory and Income Statement under LIFO

Value of ending inventory

	Units	Cost per unit	Amount
	6000	$20	$120,000
	2000	$22	$44,000
Total	8,000		$164,000

$\begin{array}{rcl}\mathrm{Ending}\mathrm{inventory}\mathrm{per}\mathrm{unit}\mathrm{cost}& =& \frac{\mathrm{Ending}\mathrm{inventory}\mathrm{value}}{\mathrm{Ending}\mathrm{inventory}\mathrm{units}}\\ & =& \frac{164,000}{8,000}\\ & =& 20.5\end{array}$

Condensed Income Statement

Particular		Amount
Sales		$1,050,000
Cost of goods sold:
Opening Stock	$120,000
Add: Purchases	$592,000
Less: Closing stock	$164,000	$548,000
Gross Profit		$502,000
Less: Operating Expenses		$200,000
Net Income		$302,000