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The management of National Inc. asks your help in determining the comparative effects of the FIFO and LIFO inventory cost flow methods. For 2022, the accounting records show these data.

Inventory, January 1 (10,000 units) $35,000
Cost of 120,000 units purchased 468,500
Selling price of 98,000 units sold 750,000
Operating expenses 124,000

Units purchased consisted of 35,000 units at $3.70 on May 10; 60,000 units at $3.90 on August 15; and 25,000 units at $4.20 on November 20. Income taxes are 28%.

Required:
Prepare comparative condensed income statements for 2022 under FIFO and LIFO.

Sagot :

Zviko

Answer:

National Inc.

Comparative condensed income statements for 2022

                                                            FIFO                     LIFO

Sales                                                   $750,000           750,000

Less Cost of Sales                             ($371,200)        ($394,500)

Gross Profit                                         $378,800         $355,500

Less Expenses

Operating expenses                         ($124,000)         ($124,000)

Operating Profit                                 $254,800           $231,500

Income tax expense                            ($71,344)           ($64,820)

Net Income (Loss)                               $183,456           $166,680

Explanation:

FIFO

Assumes that the units to arrive first will be sold first. Therefore, the Cost of Goods Sold will be based on the earlier (old) prices.

Cost of Sales = 10,000 x $3.50 + 35,000 x $3.70 + 53,000 x $3.90 = $371,200

LIFO

Assumes that the units to arrive last will be sold first, Hence the Cost of Goods Sold will be based on the later (new) prices.

Cost of Sales = 25,000 x $4.20 + 60,000 x $3.90 + 15,000 x $3.70 = $394,500

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