The management of Clare Co. asks your help in determining the comparative effects of the FIFO and LIFO inventory cost flow methods. For 2011, the accounting records show the following data.
- Inventory, January 1 (10,000 units) $ 45,000
- Cost of 100,000 units purchased 532,000
- Selling price of 80,000 units sold 700,000
- Operating expenses 140,000
Units purchased consisted of 35,000 units at $5.10 on May 10; 35,000 units at $5.30 on August 15; and 30,000 units at $5.60 on November 20. Income taxes are 30%.
Instructions
(a) Prepare comparative condensed income statements for 2011 under FIFO and LIFO. (Show
computations of ending inventory.)
(b) Answer the following questions for management.
(1) Which inventory cost flow method produces the most meaningful inventory amount for
the balance sheet? Why?
(2) Which inventory cost flow method produces the most meaningful net income? Why?
(3) Which inventory cost flow method is most 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) How much of the gross profit under FIFO is illusory in comparison with the gross profit
under LIFO?