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Chapter 8: 13Q (page 421)
How might a company obtain a price index in order to apply dollar-value LIFO?
The price index is the ratio of ending inventory level at the current price level and base level.
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Question: 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.
Instructions
(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.
Ehlo Company is a multiproduct firm. Presented below is information concerning one of its products, the Hawkeye.
Date Transaction Quantity Price/Cost
1/1 Beginning inventory 1,000 $12
2/4 Purchase 2,000 18
2/20 Sale 2,500 30
4/2 Purchase 3,000 23
11/4 Sale 2,200 33
Instructions
Compute cost of goods sold, assuming Ehlo uses:
(a) Periodic system, FIFO cost flow. (d) Perpetual system, LIFO cost flow.
(b) Perpetual system, FIFO cost flow. (e) Periodic system, weighted-average
cost flow.
(c) Periodic system, LIFO cost flow. (f) Perpetual system, moving-average
cost flow.
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 current-year 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 flow \( 174,400 \) 160,000
Extra cash \( 14,400 0
Increased cash flow 9% 0%
Instructions
(a) Explain what is meant by the LIFO reserve account.
(b) How does LIFO subtract inflation from inventory costs?
(c) Explain how the cash flow of \)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.
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 \(8,100, terms f.o.b. destination, was received and entered January 2, 2017. The receiving report shows that the materials were received December 28, 2016.
2. Materials costing \)28,000, shipped f.o.b. destination, were not entered by December 31, 2016, “because they were in a railroad car on the company’s siding on that date and had not been unloaded.”
3. Materials costing \(7,300 were returned to the supplier on December 29, 2016, and were shipped f.o.b. shipping point. The return was entered on that date, even though the materials are not expected to reach the supplier’s place of business until January 6, 2017.
4. An invoice for \)7,500, terms f.o.b. shipping point, was received and entered December 30, 2016. The receiving report shows that the materials were received January 4, 2017, and the bill of lading shows that they were shipped January 2, 2017.
5. Materials costing $19,800 were received December 30, 2016, but no entry was made for them because “they were ordered with a specified delivery of no earlier than January 10, 2017.”
Instructions -
Prepare correcting general journal entries required at December 31, 2016, assuming that the books have not been closed.
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?
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