Problem: The management of Aurora 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 2002 if either the FIFO method or the LIFO method had been used. For 2002, the accounting records show the following data.
|
Inventories |
|
|
|
Purchases and Sales |
|
| Beginning (15,000 units) 34,000 |
|
|
Total net sales (225,000 units) $865,000 |
| Ending (20,000 units) |
|
|
|
Total cost of goods purchased |
|
|
|
|
|
|
|
(230,000 units) $591,500 |
Purchases were made quarterly as follows.
| Quarter |
|
Units |
|
Unit Cost |
|
Total Cost |
| 1 |
|
60,000 |
|
$2.40 |
|
$144,000 |
| 2 |
|
50,000 |
|
2.5 |
|
125,000 |
| 3 |
|
50,000 |
|
2.6 |
|
130,000 |
| 4 |
|
70,000 |
|
2.75 |
|
192,500 |
|
|
230,000 |
|
|
|
$591,500 |
Operating expenses were $147,000 and the company's income tax rate is 32%
Instructions:
(a) Prepare comparative condensed income statements for 2002 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.)