Chapter 8 Valuation of Inventories A Cost-Basis Approach
Chapter 8 Valuation of Inventories A Cost-Basis Approach
1. In what ways are the inventory accounts of a retailing company different from those of a manufacturing company?
2. Why should inventories be included in (a) a statement of financial position and (b) the computation of net income?
3. What is the difference between a perpetual inventory and a physical inventory? If a company maintains a perpetual inventory, should its physical inventory at any date be equal to the amount indicated by the perpetual inventory records? Why?
4. Mishima, Inc. indicated in a recent annual report that approximately $19 million of merchandise was received on consignment. Should Mishima, Inc. report this amount on its balance sheet? Explain.
5. What is a product financing arrangement? How should product financing arrangements be reported in the financial statements?
6. Where, if at all, should the following items be classified on a balance sheet?
(a) Goods out on approval to customers.
(b) Goods in transit that were recently purchased f.o.b. destination.
(c) Land held by a realty firm for sale.
(d) Raw materials.
(e) Goods received on consignment.
(f) Manufacturing supplies.
7. At the balance sheet date, Clarkson Company held title to goods in transit amounting to $214,000. This amount was omitted from the purchases figure for the year and also from the ending inventory. What is the effect of this omission on the net income for the year as calculated when the books are closed? What is the effect on the company’s financial position as shown in its balance sheet? Is materiality a factor in determining whether an adjustment for this item should be made?
8. Define “cost” as applied to the valuation of inventories.
9. Distinguish between product costs and period costs as they relate to inventory.
10. Ford Motor Co. is considering alternate methods of accounting for the cash discounts it takes when paying suppliers promptly. One method suggested was to report these discounts as financial income when payments are made. Comment on the propriety of this approach.
11. Zonker Inc. purchases 500 units of an item at an invoice cost of $30,000. What is the cost per unit? If the goods are shipped f.o.b. shipping point and the freight bill was $1,500, what is the cost per unit if Zonker Inc. pays the freight charges? If these items were bought on 2/10, n/30 terms and the invoice and the freight bill were paid within the 10-day period, what would be the cost per unit?
12. Specific identification is sometimes said to be the ideal method of assigning cost to inventory and to cost of goods sold. Briefly indicate the arguments for and against this method of inventory valuation.
13. FIFO, average-cost, and LIFO methods are often used instead of specific identification for inventory valuation purposes. Compare these methods with the specific identification method, discussing the theoretical propriety of each method in the determination of income and asset valuation.
14. How might a company obtain a price index in order to apply dollar-value LIFO?
15. Describe the LIFO double-extension method. Using the following information, compute the index at December 31,
2014, applying the double-extension method to a LIFO pool consisting of 25,500 units of product A and 10,350 units of product B. The base-year cost of product A is $10.20 and of product B is $37.00. The price at December 31,
2014, for product A is $21.00 and for product B is $45.60.
(Round to two decimal places.)
16. As compared with the FIFO method of costing inventories, does the LIFO method result in a larger or smaller net income in a period of rising prices? What is the comparative effect on net income in a period of falling prices?
17. What is the dollar-value method of LIFO inventory valuation?
What advantage does the dollar-value method have over the specific goods approach of LIFO inventory valuation? Why will the traditional LIFO inventory costing method and the dollar-value LIFO inventory costing method produce different inventory valuations if the composition of the inventory base changes?
18. Explain the following terms.
(a) LIFO layer.
(b) LIFO reserve.
(c) LIFO effect.
19. On December 31, 2013, the inventory of Powhattan
Company amounts to $800,000. During 2014, the company decides to use the dollar-value LIFO method of costing inventories. On December 31, 2014, the inventory is $1,053,000 at December 31, 2014, prices. Using the
December 31, 2013, price level of 100 and the December
31, 2014, price level of 108, compute the inventory value at
December 31, 2014, under the dollar-value LIFO method.
20. In an article that appeared in the Wall Street Journal, the phrases “phantom (paper) profits” and “high LIFO profits” through involuntary liquidation were used. Explain these phrases.
BE8-1 Included in the December 31 trial balance of Rivera Company are the following assets.
Cash $ 190,000 Work in process $200,000
Equipment (net) 1,100,000 Accounts receivable (net) 400,000
Prepaid insurance 41,000 Patents 110,000
Raw materials 335,000 Finished goods 170,000
Prepare the current assets section of the December 31 balance sheet.
BE8-2 Matlock Company uses a perpetual inventory system. Its beginning inventory consists of 50 units that cost $34 each. During June, the company purchased 150 units at $34 each, returned 6 units for credit, and sold 125 units at $50 each. Journalize the June transactions.
BE8-3 Stallman Company took a physical inventory on December 31 and determined that goods costing $200,000 were on hand. Not included in the physical count were $25,000 of goods purchased from Pelzer
Corporation, f.o.b. shipping point, and $22,000 of goods sold to Alvarez Company for $30,000, f.o.b. destination.
Both the Pelzer purchase and the Alvarez sale were in transit at year-end. What amount should
Stallman report as its December 31 inventory?
BE8-4 Bienvenu Enterprises reported cost of goods sold for 2014 of $1,400,000 and retained earnings of $5,200,000 at December 31, 2014. Bienvenu later discovered that its ending inventories at December 31,
2013 and 2014, were overstated by $110,000 and $35,000, respectively. Determine the corrected amounts for
2014 cost of goods sold and December 31, 2014, retained earnings.
BE8-5 Amsterdam Company uses a periodic inventory system. For April, when the company sold 600 units, the following information is available.
Units Unit Cost Total Cost
April 1 inventory 250 $10 $ 2,500
April 15 purchase 400 12 4,800
April 23 purchase 350 13 4,550
Compute the April 30 inventory and the April cost of goods sold using the average-cost method.
BE8-6 Data for Amsterdam Company are presented in
BE8-5. Compute the April 30 inventory and the
April cost of goods sold using the FIFO method.
BE8-7 Data for Amsterdam Company are presented in
BE8-5. Compute the April 30 inventory and the
April cost of goods sold using the LIFO method.
BE8-8 Midori Company had ending inventory at end-of-year prices of $100,000 at December 31, 2013; $119,900 at December 31, 2014; and $134,560 at December 31, 2015. The year-end price indexes were 100 at
12/31/13, 110 at 12/31/14, and 116 at 12/31/15. Compute the ending inventory for Midori Company for
2013 through 2015 using the dollar-value LIFO method.
BE8-9 Arna, Inc. uses the dollar-value LIFO method of computing its inventory. Data for the past 3 years follow.
Year Ended December 31 Inventory at Current-Year Cost Price Index
2013 $19,750 100
2014 22,140 108
2015 25,935 114
Compute the value of the 2014 and 2015 inventories using the dollar-value LIFO method.
E8-1 (Inventoriable Costs) Presented below is a list of items that may or may not be reported as inventory in a company’s December 31 balance sheet.
1. Goods out on consignment at another company’s store.
2. Goods sold on an installment basis (bad debts can be reasonably estimated).
3. Goods purchased f.o.b. shipping point that are in transit at December 31.
4. Goods purchased f.o.b. destination that are in transit at December 31.
5. Goods sold to another company, for which our company has signed an agreement to repurchase at a set price that covers all costs related to the inventory.
6. Goods sold where large returns are predictable.
7. Goods sold f.o.b. shipping point that are in transit at December 31.
8. Freight charges on goods purchased.
9. Interest costs incurred for inventories that are routinely manufactured.
10. Costs incurred to advertise goods held for resale.
11. Materials on hand not yet placed into production by a manufacturing firm.
12. Office supplies.
13. Raw materials on which a manufacturing firm has started production but which are not completely processed.
14. Factory supplies.
15. Goods held on consignment from another company.
16. Costs identified with units completed by a manufacturing firm but not yet sold.
17. Goods sold f.o.b. destination that are in transit at December 31.
18. Short-term investments in stocks and bonds that will be resold in the near future.
Indicate which of these items would typically be reported as inventory in the financial statements. If an item should not be reported as inventory, indicate how it should be reported in the financial statements.
E8-2 (Inventoriable Costs) In your audit of Jose Oliva Company, you find that a physical inventory on
December 31, 2014, showed merchandise with a cost of $441,000 was on hand at that date. You also discover the following items were all excluded from the $441,000.
1. Merchandise of $61,000 which is held by Oliva on consignment. The consignor is the Max Suzuki
2. Merchandise costing $38,000 which was shipped by Oliva f.o.b. destination to a customer on
December 31, 2014. The customer was expected to receive the merchandise on January 6, 2015.
3. Merchandise costing $46,000 which was shipped by Oliva f.o.b. shipping point to a customer on
December 29, 2014. The customer was scheduled to receive the merchandise on January 2, 2015.
4. Merchandise costing $83,000 shipped by a vendor f.o.b. destination on December 30, 2014, and received by Oliva on January 4, 2015.
5. Merchandise costing $51,000 shipped by a vendor f.o.b. shipping point on December 31, 2014, and received by Oliva on January 5, 2015.
Based on the above information, calculate the amount that should appear on Oliva’s balance sheet at
December 31, 2014, for inventory.
E8-3 (Inventoriable Costs) Assume that in an annual audit of Harlowe Inc. at December 31, 2014, you find the following transactions near the closing date.
1. A special machine, fabricated to order for a customer, was finished and specifically segregated in the back part of the shipping room on December 31, 2014. The customer was billed on that date and the machine excluded from inventory although it was shipped on January 4, 2015.
2. Merchandise costing $2,800 was received on January 3, 2015, and the related purchase invoice recorded
January 5. The invoice showed the shipment was made on December 29, 2014, f.o.b. destination.
3. A packing case containing a product costing $3,400 was standing in the shipping room when the physical inventory was taken. It was not included in the inventory because it was marked “Hold for shipping instructions.” Your investigation revealed that the customer’s order was dated December
18, 2014, but that the case was shipped and the customer billed on January 10, 2015. The product was a stock item of your client.
4. Merchandise received on January 6, 2015, costing $680 was entered in the purchase journal on
January 7, 2015. The invoice showed shipment was made f.o.b. supplier’s warehouse on December 31,
2014. Because it was not on hand at December 31, it was not included in inventory.
5. Merchandise costing $720 was received on December 28, 2014, and the invoice was not recorded. You located it in the hands of the purchasing agent; it was marked “on consignment.”
Assuming that each of the amounts is material, state whether the merchandise should be included in the client’s inventory, and give your reason for your decision on each item.
E8-4 (Inventoriable Costs—Perpetual) Colin Davis Machine Company maintains a general ledger account for each class of inventory, debiting such accounts for increases during the period and crediting them for decreases. The transactions below relate to the Raw Materials inventory account, which is debited for materials purchased and credited for materials requisitioned for use.
1. An invoice for $8,100, terms f.o.b. destination, was received and entered January 2, 2014. The receiving report shows that the materials were received December 28, 2013.
2. Materials costing $28,000, shipped f.o.b. destination, were not entered by December 31, 2013, “because they were in a railroad car on the company’s siding on that date and had not been unloaded.”
3. Materials costing $7,300 were returned to the supplier on December 29, 2013, and were shipped f.o.b. shipping point. The return was entered on that date, even though the materials are not expected to reach the supplier’s place of business until January 6, 2014.
4. An invoice for $7,500, terms f.o.b. shipping point, was received and entered December 30, 2013. The receiving report shows that the materials were received January 4, 2014, and the bill of lading shows that they were shipped January 2, 2014.
5. Materials costing $19,800 were received December 30, 2013, but no entry was made for them because “they were ordered with a specified delivery of no earlier than January 10, 2014.”
Prepare correcting general journal entries required at December 31, 2013, assuming that the books have not been closed.
E8-5 (Inventoriable Costs—Error Adjustments) Craig Company asks you to review its December 31,
2014, inventory values and prepare the necessary adjustments to the books. The following information is given to you.
1. Craig uses the periodic method of recording inventory. A physical count reveals $234,890 of inventory on hand at December 31, 2014.
2. Not included in the physical count of inventory is $13,420 of merchandise purchased on December
15 from Browser. This merchandise was shipped f.o.b. shipping point on December 29 and arrived in January. The invoice arrived and was recorded on December 31.
3. Included in inventory is merchandise sold to Champy on December 30, f.o.b. destination. This merchandise was shipped after it was counted. The invoice was prepared and recorded as a sale on account for $12,800 on December 31. The merchandise cost $7,350, and Champy received it on January 3.
4. Included in inventory was merchandise received from Dudley on December 31 with an invoice price of $15,630. The merchandise was shipped f.o.b. destination. The invoice, which has not yet arrived, has not been recorded.
5. Not included in inventory is $8,540 of merchandise purchased from Glowser Industries. This merchandise was received on December 31 after the inventory had been counted. The invoice was received and recorded on December 30.
6. Included in inventory was $10,438 of inventory held by Craig on consignment from Jackel
7. Included in inventory is merchandise sold to Kemp f.o.b. shipping point. This merchandise was shipped after it was counted. The invoice was prepared and recorded as a sale for $18,900 on
December 31. The cost of this merchandise was $10,520, and Kemp received the merchandise on
8. Excluded from inventory was a carton labeled “Please accept for credit.” This carton contains merchandise costing $1,500 which had been sold to a customer for $2,600. No entry had been made to the books to reflect the return, but none of the returned merchandise seemed damaged.
(a) Determine the proper inventory balance for Craig Company at December 31, 2014.
(b) Prepare any correcting entries to adjust inventory to its proper amount at December 31, 2014.
Assume the books have not been closed.
E8-6 (Determining Merchandise Amounts—Periodic) Two or more items are omitted in each of the following tabulations of income statement data. Fill in the amounts that are missing.
2013 2014 2015
Sales revenue $290,000 $ ? $410,000
Sales returns and allowances 11,000 13,000 ?
Net sales ? 347,000 ?
Beginning inventory 20,000 32,000 ?
Ending inventory ? ? ?
Purchases ? 260,000 298,000
Purchase returns and allowances 5,000 8,000 10,000
Freight-in 8,000 9,000 12,000
Cost of goods sold 233,000 ? 293,000
Gross profi t on sales 46,000 91,000 97,000
E8-7 (Purchases Recorded Net) Presented below are transactions related to Tom Brokaw, Inc.
May 10 Purchased goods billed at $15,000 subject to cash discount terms of 2/10, n/60.
11 Purchased goods billed at $13,200 subject to terms of 1/15, n/30.
19 Paid invoice of May 10.
24 Purchased goods billed at $11,500 subject to cash discount terms of 2/10, n/30.
(a) Prepare general journal entries for the transactions above under the assumption that purchases are to be recorded at net amounts after cash discounts and that discounts lost are to be treated as financial expense.
(b) Assuming no purchase or payment transactions other than those given above, prepare the adjusting entry required on May 31 if financial statements are to be prepared as of that date.
E8-8 (Purchases Recorded, Gross Method) Cruise Industries purchased $10,800 of merchandise on
February 1, 2014, subject to a trade discount of 10% and with credit terms of 3/15, n/60. It returned $2,500
(gross price before trade or cash discount) on February 4. The invoice was paid on February 13.
(a) Assuming that Cruise uses the perpetual method for recording merchandise transactions, record the purchase, return, and payment using the gross method.
(b) Assuming that Cruise uses the periodic method for recording merchandise transactions, record the purchase, return, and payment using the gross method.
(c) At what amount would the purchase on February 1 be recorded if the net method were used?
E8-9 (Periodic versus Perpetual Entries) Fong Sai-Yuk Company sells one product. Presented below is information for January for Fong Sai-Yuk Company.
Jan. 1 Inventory 100 units at $5 each
4 Sale 80 units at $8 each
11 Purchase 150 units at $6 each
13 Sale 120 units at $8.75 each
20 Purchase 160 units at $7 each
27 Sale 100 units at $9 each
Fong Sai-Yuk uses the FIFO cost flow assumption. All purchases and sales are on account.
(a) Assume Fong Sai-Yuk uses a periodic system. Prepare all necessary journal entries, including the end-of-month closing entry to record cost of goods sold. A physical count indicates that the ending inventory for January is 110 units.
(b) Compute gross profit using the periodic system.
(c) Assume Fong Sai-Yuk uses a perpetual system. Prepare all necessary journal entries.
(d) Compute gross profit using the perpetual system.
E8-10 (Inventory Errors—Periodic) Ann M. Martin Company makes the following errors during the current year. (Evaluate each case independently and assume ending inventory in the following year is correctly stated.)
1. Ending inventory is overstated, but purchases and related accounts payable are recorded correctly.
2. Both ending inventory and purchases and related accounts payable are understated. (Assume this purchase was recorded and paid for in the following year.)
3. Ending inventory is correct, but a purchase on account was not recorded. (Assume this purchase was recorded and paid for in the following year.)
Indicate the effect of each of these errors on working capital, current ratio (assume that the current ratio is greater than 1), retained earnings, and net income for the current year and the subsequent year.
E8-11 (Inventory Errors) At December 31, 2013, Stacy McGill Corporation reported current assets of $370,000 and current liabilities of $200,000. The following items may have been recorded incorrectly.
1. Goods purchased costing $22,000 were shipped f.o.b. shipping point by a supplier on December 28.
McGill received and recorded the invoice on December 29, 2013, but the goods were not included in
McGill’s physical count of inventory because they were not received until January 4, 2014.
2. Goods purchased costing $15,000 were shipped f.o.b. destination by a supplier on December 26.
McGill received and recorded the invoice on December 31, but the goods were not included in
McGill’s 2013 physical count of inventory because they were not received until January 2, 2014.
3. Goods held on consignment from Claudia Kishi Company were included in McGill’s December 31,
2013, physical count of inventory at $13,000.
4. Freight-in of $3,000 was debited to advertising expense on December 28, 2013.
(a) Compute the current ratio based on McGill’s balance sheet.
(b) Recompute the current ratio after corrections are made.
(c) By what amount will income (before taxes) be adjusted up or down as a result of the corrections?
E8-12 (Inventory Errors) The net income per books of Linda Patrick Company was determined without knowledge of the errors indicated.
Net Income Error in Ending
Year per Books Inventory
2009 $50,000 Overstated $ 3,000
2010 52,000 Overstated 9,000
2011 54,000 Understated 11,000
2012 56,000 No error
2013 58,000 Understated 2,000
2014 60,000 Overstated 8,000
Prepare a worksheet to show the adjusted net income figure for each of the 6 years after taking into account the inventory errors.
E8-13 (FIFO and LIFO—Periodic and Perpetual) Inventory information for Part 311 of Monique Aaron
Corp. discloses the following information for the month of June.
June 1 Balance 300 units @ $10 June 10 Sold 200 units @ $24
11 Purchased 800 units @ $12 15 Sold 500 units @ $25
20 Purchased 500 units @ $13 27 Sold 300 units @ $27
(a) Assuming that the periodic inventory method is used, compute the cost of goods sold and ending inventory under (1) LIFO and (2) FIFO.
(b) Assuming that the perpetual inventory method is used and costs are computed at the time of each withdrawal, what is the value of the ending inventory at LIFO?
(c) Assuming that the perpetual inventory method is used and costs are computed at the time of each withdrawal, what is the gross profit if the inventory is valued at FIFO?
(d) Why is it stated that LIFO usually produces a lower gross profit than FIFO?
E8-14 (FIFO, LIFO and Average-Cost Determination) John Adams Company’s record of transactions for the month of April was as follows.
April 1 (balance on hand) 600 @ $ 6.00 April 3 500 @ $10.00
4 1,500 @ 6.08 9 1,400 @ 10.00
8 800 @ 6.40 11 600 @ 11.00
13 1,200 @ 6.50 23 1,200 @ 11.00
21 700 @ 6.60 27 900 @ 12.00
29 500 @ 6.79 4,600
(a) Assuming that periodic inventory records are kept in units only, compute the inventory at April 30 using (1) LIFO and (2) average-cost.
(b) Assuming that perpetual inventory records are kept in dollars, determine the inventory using
(1) FIFO and (2) LIFO.
(c) Compute cost of goods sold assuming periodic inventory procedures and inventory priced at FIFO.
(d) In an inflationary period, which inventory method—FIFO, LIFO, average-cost—will show the highest net income?
E8-15 (FIFO, LIFO, Average-Cost Inventory) Shania Twain Company was formed on December 1, 2013.
The following information is available from Twain’s inventory records for Product BAP.
Units Unit Cost
January 1, 2014 (beginning inventory) 600 $ 8.00
January 5, 2014 1,200 9.00
January 25, 2014 1,300 10.00
February 16, 2014 800 11.00
March 26, 2014 600 12.00
A physical inventory on March 31, 2014, shows 1,600 units on hand.
Prepare schedules to compute the ending inventory at March 31, 2014, under each of the following inventory methods.
(a) FIFO. (b) LIFO. (c) Weighted-average (round unit costs to two decimal places).
E8-16 (Compute FIFO, LIFO, Average-Cost—Periodic) Presented below is information related to
Blowfish radios for the Hootie Company for the month of July.
Units Unit Units Selling
Date Transaction In Cost Total Sold Price Total
July 1 Balance 100 $4.10 $ 410
6 Purchase 800 4.20 3,360
7 Sale 300 $7.00 $ 2,100
10 Sale 300 7.30 2,190
12 Purchase 400 4.50 1,800
15 Sale 200 7.40 1,480
18 Purchase 300 4.60 1,380
22 Sale 400 7.40 2,960
25 Purchase 500 4.58 2,290
30 Sale 200 7.50 1,500
Totals 2,100 $9,240 1,400 $10,230
(a) Assuming that the periodic inventory method is used, compute the inventory cost at July 31 under each of the following cost flow assumptions.
(b) Answer the following questions.
(1) Which of the methods used above will yield the lowest figure for gross profit for the income statement? Explain why.
(2) Which of the methods used above will yield the lowest figure for ending inventory for the balance sheet? Explain why.
E8-17 (FIFO and LIFO—Periodic and Perpetual) The following is a record of Pervis Ellison Company’s transactions for Boston Teapots for the month of May 2014.
May 1 Balance 400 units @ $20 May 10 Sale 300 units @ $38
12 Purchase 600 units @ $25 20 Sale 540 units @ $38
28 Purchase 400 units @ $30
(a) Assuming that perpetual inventories are not maintained and that a physical count at the end of the month shows 560 units on hand, what is the cost of the ending inventory using (1) FIFO and
(b) Assuming that perpetual records are maintained and they tie into the general ledger, calculate the ending inventory using (1) FIFO and (2) LIFO.
E8-18 (FIFO and LIFO; Income Statement Presentation) 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
Prepare a condensed income statement for the year on both bases for comparative purposes.
E8-19 (FIFO and LIFO Effects) You are the vice president of finance of Sandy Alomar Corporation, a retail company that prepared two different schedules of gross margin for the first quarter ended March 31, 2014.
These schedules appear below.
Sales Cost of Gross
($5 per unit) Goods Sold Margin
Schedule 1 $150,000 $124,900 $25,100
Schedule 2 150,000 129,400 20,600
The computation of cost of goods sold in each schedule is based on the following data.
Units per Unit Cost
Beginning inventory, January 1 10,000 $4.00 $40,000
Purchase, January 10 8,000 4.20 33,600
Purchase, January 30 6,000 4.25 25,500
Purchase, February 11 9,000 4.30 38,700
Purchase, March 17 11,000 4.40 48,400
Jane Torville, the president of the corporation, cannot understand how two different gross margins can be computed from the same set of data. As the vice president of finance, you have explained to Ms. Torville that the two schedules are based on different assumptions concerning the flow of inventory costs, i.e., FIFO and LIFO. Schedules 1 and 2 were not necessarily prepared in this sequence of cost flow assumptions.
Prepare two separate schedules computing cost of goods sold and supporting schedules showing the composition of the ending inventory under both cost flow assumptions.
E8-20 (FIFO and LIFO—Periodic) Johnny Football Shop began operations on January 2, 2014. The following stock record card for footballs was taken from the records at the end of the year.
Units Unit Invoice Gross Invoice
Date Voucher Terms Received Cost Amount
1/15 10624 Net 30 50 $20 $1,000
3/15 11437 1/5, net 30 65 16 1,040
6/20 21332 1/10, net 30 90 15 1,350
9/12 27644 1/10, net 30 84 12 1,008
11/24 31269 1/10, net 30 76 11 836
Totals 365 $5,234
A physical inventory on December 31, 2014, reveals that 100 footballs were in stock. The bookkeeper informs you that all the discounts were taken. Assume that Johnny Football Shop uses the invoice price less discount for recording purchases.
(a) Compute the December 31, 2014, inventory using the FIFO method.
(b) Compute the 2014 cost of goods sold using the LIFO method.
(c) What method would you recommend to the owner to minimize income taxes in 2014, using the inventory information for footballs as a guide?
E8-21 (LIFO Effect) The following example was provided to encourage the use of the LIFO method. In a nutshell, LIFO subtracts inflation from inventory costs, deducts it from taxable income, and records it in a
LIFO reserve account on the books. The LIFO benefit grows as inflation widens the gap between currentyear and past-year (minus inflation) inventory costs. This gap is:
With LIFO Without LIFO
Revenues $3,200,000 $3,200,000
Cost of goods sold 2,800,000 2,800,000
Operating expenses 150,000 150,000
Operating income 250,000 250,000
LIFO adjustment 40,000 0
Taxable income $ 210,000 $ 250,000
Income taxes @ 36% $ 75,600 $ 90,000
Cash fl ow $ 174,400 $ 160,000
Extra cash $ 14,400 0
Increased cash fl ow 9% 0%
(a) Explain what is meant by the LIFO reserve account.
(b) How does LIFO subtract inflation from inventory costs?
(c) Explain how the cash flow of $174,400 in this example was computed. Explain why this amount may not be correct.
(d) Why does a company that uses LIFO have extra cash? Explain whether this situation will always exist.
E8-22 (Alternative Inventory Methods—Comprehensive) Tori Amos Corporation began operations on
December 1, 2013. The only inventory transaction in 2013 was the purchase of inventory on December 10,
2013, at a cost of $20 per unit. None of this inventory was sold in 2013. Relevant information is as follows.
Ending inventory units
December 31, 2013 100
December 31, 2014, by purchase date
December 2, 2014 100
July 20, 2014 50 150
During the year, the following purchases and sales were made.
March 15 300 units at $24 April 10 200
July 20 300 units at 25 August 20 300
September 4 200 units at 28 November 18 150
December 2 100 units at 30 December 12 200
The company uses the periodic inventory method.
(a) Determine ending inventory under (1) specific identification, (2) FIFO, (3) LIFO, and (4) average-cost.
(b) Determine ending inventory using dollar-value LIFO. Assume that the December 2, 2014, purchase cost is the current cost of inventory. (Hint: The beginning inventory is the base layer priced at $20 per unit.)
E8-23 (Dollar-Value LIFO) Oasis Company has used the dollar-value LIFO method for inventory cost determination for many years. The following data were extracted from Oasis’ records.
Price Ending Inventory Ending Inventory
Date Index at Base Prices at Dollar-Value LIFO
December 31, 2014 105 $92,000 $92,600
December 31, 2015 ? 97,000 98,350
Calculate the index used for 2015 that yielded the above results.
E8-24 (Dollar-Value LIFO) The dollar-value LIFO method was adopted by Enya Corp. on January 1, 2014.
Its inventory on that date was $160,000. On December 31, 2014, the inventory at prices existing on that date amounted to $140,000. The price level at January 1, 2014, was 100, and the price level at December 31, 2014, was 112.
(a) Compute the amount of the inventory at December 31, 2014, under the dollar-value LIFO method.
(b) On December 31, 2015, the inventory at prices existing on that date was $172,500, and the price level was 115. Compute the inventory on that date under the dollar-value LIFO method.
E8-25 (Dollar-Value LIFO) Presented below is information related to Dino Radja Company.
Ending Inventory Price
Date (End-of-Year Prices) Index
December 31, 2011 $ 80,000 100
December 31, 2012 115,500 105
December 31, 2013 108,000 120
December 31, 2014 122,200 130
December 31, 2015 154,000 140
December 31, 2016 176,900 145
Compute the ending inventory for Dino Radja Company for 2011 through 2016 using the dollar-value LIFO method.
E8-26 (Dollar-Value LIFO) The following information relates to the Jimmy Johnson Company.
Ending Inventory Price
Date (End-of-Year Prices) Index
December 31, 2010 $ 70,000 100
December 31, 2011 90,300 105
December 31, 2012 95,120 116
December 31, 2013 105,600 120
December 31, 2014 100,000 125
Use the dollar-value LIFO method to compute the ending inventory for Johnson Company for 2010 through 2014.