The management of Morales Co. is reevaluating the appropriateness of using its present inventory cost flow method, which is average-cost.They request your help in determining the results of operations for 2010 if either the FIFO method or the LIFO method had been used. For 2010, the accounting records show the following data.

Inventories

Never use plagiarized sources. Get Your Original Essay on
Business Finance – Accounting Assignment
Hire Professionals Just from $11/Page
Order Now Click here
 

Purchases and Sales

 

Beginning (15,000 units)

$32,000

Total net sales (215,000 units)

$865,000

 

Ending (30,000 units)

 

Total cost of goods purchased

   

(230,000 units)

595,000

 

Purchases were made quarterly as follows.

Quarter

Units

Unit Cost

Total Cost

1

60,000

$2.40

$144,000

2

50,000

2.50

125,000

3

50,000

2.60

130,000

4

70,000

2.80

196,000

 

230,000

 

$595,000

Operating expenses were $147,000, and the company’s income tax rate is 34%.

Instructions

(a) Prepare comparative condensed income statements for 2010 under FIFO and LIFO. (Show computations of ending inventory.)

(b) Answer the following questions for management.

(1) Which cost flow method (FIFO or LIFO) produces the more meaningful inventory amount for the balance sheet? Why?

(2) Which cost flow method (FIFO or LIFO) produces the more meaningful net income? Why?

(3) Which cost flow method (FIFO or LIFO) is more likely to approximate actual physical flow of the goods? Why?

(4) How much additional cash will be available for management under LIFO than under FIFO? Why?

(5) Will gross profit under the average-cost method be higher or lower than (a) FIFO and (b) LIFO? (Note: It is not necessary to quantify your answer.

Need a custom written plagiarism free essay? Click here to order now.

Open chat
Lets chat on via WhatsApp
Hello, Welcome to our WhatsApp support. Reply to this message to start a chat.