Use the data in Exercise 5-3 to prepare comparative income statements for the month of January for Laker Company similar to those shown in Exhibit 5.8 for the four inventory methods. Assume expenses are $1,250 and that the applicable income tax rate is 40%. (Round amounts to cents.)
3. If costs were rising instead of falling, which method would yield the highest net income?
The FIFO inventory valuation method will give higher net income when the prices rise.
An economic situation of the country under which the price level of the goods declines is known as deflation. Such a situation arises when the country’s inflation rate is 0%.
Under rising prices, the FIFO method will give the highest net income because the lower initial prices incurred in inventory acquisition will be allocated to the cost of goods sold.
Question: Hallam Company’s financial statements show the following. The company recently discovered that in making physical counts of inventory, it had made the following errors: Inventory on December 31, 2016, is overstated by $18,000 and inventory on December 31, 2017, is understated by $26,000.
For the year ended December 31
(a) Cost of goods sold
(b) Net income
(c) Total Current assets
For each key financial statement figure—(a), (b), (c), and (d) above—prepare a table similar to the following to show the adjustments necessary to correct the reported amounts.
Adjustments for 12/31/2016 Error
Refer to the information in Exercise 5-3 and assume the periodic inventory system is used. Determine the costs assigned to ending inventory and to cost of goods sold using (a) specific identification, (b) weighted average, (c) FIFO, and (d) LIFO. (Round per unit costs and inventory amounts to cents.) For specific identification, ending inventory consists of 200 units, where 180 are from the January 30 purchase, 5 are from the January 20 purchase, and 15 are from beginning inventory.
A physical inventory of Liverpool Company taken at December 31 reveals the following.
Cost per unit
Market per unit
Car audio equipment
Compute the lower of cost or market for the inventory applied separately to each item.
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