Question

Broadhead Company uses a periodic inventory system. At the end of the annual accounting period, December 31 of the current year, the accounting records provided the following information for product 2:

Units Unit Cost
Inventory, December 31, prior year 2,930 $14
For the current year:

Purchase, April 11 8,880 12
Purchase, June 1 7,950 17
Sales ($59 each) 10,810

Operating expenses (excluding income tax expense): $191,000

Required:

a. Prepare a separate income statement through pretax income that details cost of goods sold for (a) Case A: FIFO and (b) Case B: LIFO.
b. Compute the difference between the pretax income and the ending inventory amount for the two cases.

Answer 1

Answer:

a.Case A: FIFO

Cost of good sold: $135,580

Pretax income: $311,210

Case B: LIFO

Cost of good sold: $169,470

Pretax income: $277,320

b.

The difference between the pretax income for two cases: $33,890

The difference between the ending inventory amount for two cases: $33,890

Explanation:

Broadhead Company uses a periodic inventory system.

a) Case A: FIFO

The FIFO is a method used to account value for inventory. Under the method, the first item of inventory purchased is the first one sold.

Broadhead Company sold 10,810 units

Cost of good sold = 2,930 x $14 + 7,880 x $12 = $135,580

Pretax income = Sales - Cost of good sold - Operating expenses = $59 x 10,810 - $135,580 - $191,000 = $311,210

Ending inventory = Beginning inventory + Purchasing inventory - Cost of selling inventory = 2,930 x $14 + 8,880 x $12 + 7,950 x $17 - $135,580 = $147,150

b) Case B: LIFO

The LIFO is a method used to account value for inventory. Under the method, the last item of inventory purchased is the first one sold.

Broadhead Company sold 10,810 units

Cost of good sold = 7,950 x $17 + 2860 x $12 = $169,470

Pretax income = Sales - Cost of good sold - Operating expenses = $59 x 10,810 - $169,470 - $191,000 = $277,320

Ending inventory = Beginning inventory + Purchasing inventory - Cost of selling inventory = 2,930 x $14 + 8,880 x $12 + 7,950 x $17 - $169,470 = $113,260

The difference between the pretax income and the ending inventory amount:

The pretax income (FIFO) - the pretax income(LIFO) = $311,210 - $277,320 = $33,890

The ending inventory amount (FIFO) - the ending inventory amount (LIFO) = $147,150 - $113,260 = $33,890