E9-17. Computing dollar-value LIFO (LO 13)
(AICPA adapted)
To compute ending inventory at base year prices, we need to divide
the year-end prices of each year by the respective price index, then
separate the layers to compute ending inventory at LIFO Cost. Here
are the computations:
Year Ended
December 31,
Inventory at
Respective
Year-End Prices
External
Price Index
(Base Year 2014)
Inventory at
Base Year
(2014) Price
December 31, 2015
33,000
$333 ,000
December 31, 2016
24,000
Notice that the 2016 layer was partially depleted in 2017.
E9-18. Computing dollar-value LIFO (LO 13)
(AICPA adapted)
The computation of dollar value LIFO can be seen below. The first
step is to find the base-year price of ending inventory. We can do
and use the price indices to find ending inventory at LIFO Cost as
is done below.
Ending inventory
Price
Index Base-Year Price
$780,000 1.2 $650,000
Layers at Base-Year Price
Price
Index
Ending Inventory
at LIFO Cost
E9-19. Evaluating inventory costing concepts (LO 4, 9, 10)
(AICPA adapted)
Requirement 1:
Description of fundamental cost flow assumption:
a) It is difficult, if not impossible, to measure the physical flow of
goods and, therefore, to cost items on an average price basis
b) The first-in-first-out (FIFO) method assumes that goods are used
or sold in the order they were purchased, and, therefore, the
c) Last-in-first-out (LIFO) matches the cost of the most recent
Requirement 2:
Reasons for using LIFO in an inflationary environment:
In an inflationary economy, LIFO is a useful tool. When using LIFO,
as prices rise, the company’s cost of goods sold expense also rises
because it is assumed the sale is always the most recent inventory
Requirement 3:
Proper accounting treatment when utility of goods is below cost:
The prevailing accounting treatment in this case is to value the
inventory at the lower of cost or market. For the average cost and
FIFO methods, “market” is defined as net realizable value. For
LIFO, the accounting treatment is “market” where the inventory
Lower of cost or market can be justified by the convention of
conservatism. Accountants tend to prefer conservative asset
measures. Relevance can also be used to defend the lower of cost
or market convention. Accountants generally believe that, in asset
or market method.
Financial Reporting and Analysis (7th Ed.)
Chapter 9 Solutions
Inventories
Problems/Discussion Questions
Problems
P9-1. Calculating amounts and ratios under FIFO and LIFO (LO 2, 4)
Requirement 1:
Units
Ending inventory—2017 130
Ending inventory 2016—FIFO: Units Cost/unit Total
Cost of goods sold 2016—FIFO:
Ending inventory 2017—FIFO: Units Cost/unit Total
Cost of goods sold 2017—FIFO:
Requirement 2:
Ending inventory 2016—LIFO: Units Cost/unit Total
Cost of goods sold 2016—LIFO:
Ending inventory 2017—LIFO: Units Cost/unit Total
Cost of goods sold 2017—LIFO:
Requirement 3:
In 2016, when prices paid for purchased goods were rising, FIFO
produced a higher gross margin than LIFO because it allocated the
older, lower cost purchases to cost of goods sold. During 2017,
P9-2. Determining income statement amounts for a manufacturer (LO
1,3, 12)
Requirement 1:
Computation of cost of raw materials used:
Requirement 2:
Computation of cost of goods manufactured/completed:
Cost of goods manufactured = Beginning balance in work in
process inventory + Raw materials used + Wages to factory
Requirement 3:
Computation of cost of goods sold:
Cost of goods sold = Beginning balance in finished goods
Requirement 4:
Computation of gross margin:
Requirement 5:
Computation of net income:
Net income = Gross margin – Salary to selling and administration
P9-3. Determining cost of sales under different flow assumptions —
comprehensive (LO 2, 4, 5)
Requirement 1:
The ending inventory is computed based on the cost flow
assumption, which is then subtracted from goods available for sale
Cost of Ending Inventory Cost of Goods Sold
Weighted
Unit cost:
Requirement 2:
Replacement cost of ending inventory and LIFO reserve.
a) Replacement cost of the ending inventory = 20,000 x $6.10
$122,000
b) Cost of goods sold under FIFO (periodic).
As discussed in the text, the reconciliation procedure is an
approximation. Adding the LIFO reserve to the LIFO inventory
equals replacement cost. If the inventory turns quickly, then
c) Pros and cons of the accountant’s suggestions.
Pros:
Under periodic LIFO, COGS is computed at 12/31/17, i.e., year-end.
Therefore, the 10,000 units acquired on 12/31/17 would be included
Cons:
Inventory carrying cost is higher, and the company is exposed to the
risk of an unexpected fall in demand.
Requirement 3 a:
This will be the same as the periodic FIFO method.
Proof:
Cost of Goods Sold under Perpetual FIFO
Date of Sale Units Cost/Unit Total Cost
Regardless of whether periodic or perpetual inventory procedure is
used, the cost of goods sold and ending inventory values will be the
same under FIFO cost flow assumption. However, the answers will
typically be different under LIFO. Under FIFO, the units purchased
on January 1 will be assigned to cost of goods sold first, irrespective
of when cost of goods sold is calculated. On the other hand,
identifying the most recent units purchased depends on when the
calculations are performed. For instance, if LIFO cost of goods sold
Requirement 3 b:
Quantity Unit cost
0 0
Cost of goods sold under perpetual weighted average = $30,000 +