Question

7-67 Comparison of Inventory Methods (Alternates are 7-56 and 7-69.) Dell Computer Company produces computers. The following data and descriptions are from the company's annual report ($ in millions): February 3 2012 January 28 2011 Inventories $1,404 $1,301 Assume that Dell uses the periodic inventory system. Suppose a division of Dell had the accompanying data concerning the purchase and resale of computers ($ are not in millions): Units Total $ 40,000 100,000 Inventory (January 28, 2011) Purchase (February 20, 2011) Sales, March 17, 2011 (at $900 per unit) Purchase (June 25, 2011) Sales, November 7, 2011 (at $1,000 per unit) 100 200 150 160 160 96,000 1. For these computers only, prepare a tabulation of the cost of goods sold section of the income statement for the year ended February 3, 2012. Support your computations. Show your tabu- lation for four different inventory methods: (a) FIFO, (b) LIFO, (c) average cost known as weighted-average for periodic inventory systems, and (d) specific identification. For require- ment (d), assume that the purchase of February 20 was identified with the sale of March 17. Also assume that the sale of November 7 included the sale of half of the units in beginning inventory and the remainder from the purchase of June 25. 2. By how much would income taxes differ if Dell used (a) LIFO instead of FIFO for this inventory item, and (b) LIFO instead of weighted average? Assume a 40% tax rate.

Answer 1

Part 1 (Also include workings)

a. Method : FIFO
Statement of Inventory
Date	Transaction Type	Units	Per unit Price $	Working (Rate x Qty)	Total $
28/01/2011	Opening Inventory	100	400	400 x 100	40000
20/02/2011	Purchase	200	500	500 x 100	100000
17/03/2011	Sales (at COGS)	-150	-	(400 x 100) + (50 x 500)	-65000
25/06/2011	Purchase	160	600	600 x 160	96000
07/11/2011	Sales (at COGS)	-160	-	(500 x 150) + (10 x 600)	-81000
03/02/2012	Closing Inventory	150	-	600 x 150	90000

Statement of Cost of Goods Sold
Date	Units Sold	Working (Rate x Qty)	Total COGS
17/03/2011	150	(400 x 100) + (50 x 500)	65000
07/11/2011	160	(500 x 150) + (10 x 600)	81000
		Total COGS	146000

Calculation Of Tax
TotalSales	295000
(150 x 900) + (160 x 1000)
Less: COGS	146000
Gross Income	149000
Taxes @ 40%	59600

b.Method : LIFO
Statement of Inventory
Date	Transaction Type	Units	Per unit Price $	Working (Rate x Qty)	Total $
28/01/2011	Opening Inventory	100	400	400 x 100	40000
20/02/2011	Purchase	200	500	500 x 100	100000
17/03/2011	Sales (at COGS)	-150	500	500 x 150	-75000
25/06/2011	Purchase	160	600	600 x 160	96000
07/11/2011	Sales (at COGS)	-160	160	600 x 160	-96000
03/02/2012	Closing Inventory	150	-	(400 x 100) + (500 x 50)	65000

Statement of Cost of Goods Sold
Date	Units Sold	Working (Rate x Qty)	Total COGS
17/03/2011	150	500 x 150	75000
07/11/2011	160	600 x 160	96000
		Total COGS	171000

Calculation Of Tax
TotalSales	295000
(150 x 900) + (160 x 1000)
Less: COGS	171000
Gross Income	124000
Taxes @ 40%	49600

c.Method : Weighted Average
Statement of Inventory
Date	Transaction Type	Units	Per unit Price $	Working (Rate x Qty)	Total $
28/01/2011	Opening Inventory	100	400	400 x 100	40000
20/02/2011	Purchase	200	500	500 x 100	100000
	Inventory Value	300	466.67	<- (140000 / 300)	140000
17/03/2011	Sales (at COGS)	-150	466.67	466.67 x 150	-70000.00
25/06/2011	Purchase	160	600	600 x 160	96000
	Inventory Value	310	535.48	<- (166000 / 310)	166000
07/11/2011	Sales (at COGS)	-160	535.48	535.48 x 160	-85677
03/02/2012	Closing Inventory	150	-	535.48 x 150	80323.00

Statement of Cost of Goods Sold
Date	Units Sold	Working (Rate x Qty)	Total COGS
17/03/2011	150	466.67 x 150	70000
07/11/2011	160	535.48 x 160	85677
		Total COGS	155677

Calculation Of Tax
TotalSales	295000
(150 x 900) + (160 x 1000)
Less: COGS	155677
Gross Income	139323
Taxes @ 40%	55729.20

d.Method : Specific Identification
Statement of Inventory
Date	Transaction Type	Units	Per unit Price $	Working (Rate x Qty)	Total $
28/01/2011	Opening Inventory	100	400	400 x 100	40000
20/02/2011	Purchase	200	500	500 x 100	100000
17/03/2011	Sales (at COGS)	-150	500	500 x 150	-75000
25/06/2011	Purchase	160	600	600 x 160	96000
07/11/2011	Sales (at COGS)	-160	-	(400 x 80) + (600 x 80)	-80000
03/02/2012	Closing Inventory	150	-	(400 x 20) + (500 x 50) + (600 x 80)	81000

Statement of Cost of Goods Sold
Date	Units Sold	Working (Rate x Qty)	Total COGS
17/03/2011	150	500 x 150	75000
07/11/2011	160	(400 x 80) + (600 x 80)	80000
		Total COGS	155000

Calculation Of Tax
TotalSales	295000
(150 x 900) + (160 x 1000)
Less: COGS	155000
Gross Income	140000
Taxes @ 40%	56000

Part 2

a. Tax Difference in case of LIFO instead of FIFO =$ 49600 – $ 59600

                                                                          = -$ 10000

That is less tax of $10000

b. Tax Difference in case of LIFO instead of Weighted Avg =$ 49600 - $ 55729.20

                                                                                          = -$ 6129.20

That is less tax of $6129.20

Note: Other expenses are ignored for tax calculation purpose as no details given.

Feel free to comment if any changes or further explaination required for the answer.