The management of Kirchner Inc. asks your help in determining the comparative effects of the FIFO and LIFO inventory cost flow methods. For 2010 the accounting records show these data.
Inventory, January 1 (10,000 units) $40,565
Cost of 139,080 units purchased 632,640
Selling price of 110,105 units sold 846,070
Operating expenses 139,080
Units purchased consisted of 40,565 units at $4.29 on May 10; 69,540 units at $4.52 on August 15; and 28,975 units at $4.98 on November 20. Income taxes are 28%.
KIRCHNER, INC.
Condensed Income Statements
For the Year Ended December 31, 2010
FIFO LIFO
Sales $846,070 846,070
Cost of goods sold
Beginning inventory 40,565 40,565
Cost of goods purchased 632,640 632,640
Cost of goods available for sale 673205 673205
Ending Inventory ? ?
Cost of goods sold ? ?
Gross profit ? ?
Operating expenses 139,080 139,080
Income before income taxes ? ?
Income tax expense ? ?
Net income $ ?
Answer the following questions for management.
(1) Which cost flow method produces the more meaningful inventory amount for the balance sheet? FIFO
(2) Which inventory cost flow method produces the more meaningful net income?LIFO
(3) Which cost flow method is more likely to approximate the actual physical flow of goods? FIFO
(4) How much more cash will be available for management under LIFO than under FIFO?
(5) How much of the gross profit under FIFO is illusionary in comparison with the gross profit under LIFO?