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Question 15E

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Intermediate Accounting (Kieso)
Found in: Page 426

Short Answer

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.

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

See the step by step solution

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

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

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

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