Question

E7-7 2,7-3 Analyzing and Interpreting the Financial Statement Effects of LIFO and FIFO Emily Company uses a periodic inventory system. At the end of the annual accounting period, December 31 of the current year, the accounting records provided the following information for product 2: Units Unit Cost Inventory, December 31, prior year 3,000 $ 9 For the current year: Purchase, April 11 9,000 10 Purchase, June 1 7,000 Sales ($50 each) 10,000 Operating expenses (excluding income tax expense) $190,000 Required: 1. Prepare a separate income statement through pretax income that details cost of goods sold for (a). Case A: FIFO and (b) Case B: LIFO. For each case, show the computation of the ending inventory and cost of goods sold. (Hint: Set up adjacent columns for each case.) 2. Compare the pretax income and the ending inventory amounts between the two cases. Explam te similarities and differences. 3. Which inventory costing method may be preferred for income tax purposes? Explain. Analyzing and Internrating the E7-8

Answer 1

	Calculation of cost of goods sold	FIFO				LIFO
		Qty	Rate	Cost		Qty	Rate	Cost
	Sales	3000	9	$27,000		7000	15	$105,000
		7000	10	$70,000		3000	10	$30,000
	Cost of goods old	10000		$97,000		10000		$135,000
	Ending inventory	9000		$125,000		9000		$87,000
				(2000*10)+(7000*15)				(3000*9)+(6000*10)
1	INCOME STATEMENT	FIFO		LIFO
	Sales revenue	$500,000		$500,000
	Less:
	Cost of goods sold	$97,000		$135,000
	Operating expense	$190,000		$190,000
	Pretax INCOME	$213,000		$175,000		$38,000
2	Pretax INCOME	$213,000		$175,000
	Ending inventory	$125,000		$87,000
	Pretax income under FIFO is more than $38,000 then that of LIFO and this difference is equal to difference of ending inventory under both methods.
3	LIFO method would be preferred for income tax purpose as taxable income will be lower under LIFO for the current year.

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