Student Name:
Class:
Requirement 1:
(a) (b) (c) (d)
Average Specific
Cost FIFO LIFO Identification
Sales revenue* 9,920$ 9,920$ 9,920$ 9,920$
Cost of goods sold** 3,630 3,220 4,040 3,350
Gross profit 6,290$ 6,700$ 5,880$ 6,570$
Correct! Correct! Correct! Correct!
Note: See computations below
McGraw-Hill/Irwin
Instructor
For the Month Ended January 31, 2011
Partial Income Statement
DONNER COMPANY
Problem 07-03
Computations
DONNER COMPANY
*Sales revenue:
Units 620
Cost 16$
Revenue 9,920$
**Cost of goods sold: Weighted Specific
Beginning inventory 500 2,500$ 2,500$ 2,500$ 2,500$
Purchases (net)*** 760 4,880 4,880 4,880 4,880
Goods available for sale 1,260 7,380 7,380 7,380 7,380
Ending inventory**** 640 3,750 4,160 3,340 4,030
Cost of goods sold 620 3,630$ 3,220$ 4,040$ 3,350$
Student Name:
Class:
Requirement 1:
McGraw-Hill/Irwin
Instructor
Problem 07-03
***Purchases: Dollar
Units Cost Amount
January 12 600 $6 3,600$
January 26 160 $8 1,280
Totals 760 4,880$
Correct! Correct!
****Ending inventory:
(b) FIFO: Units Cost Total
160 $8 1,280$
480 $6 2,880
Ending inventory 640 4,160$
Correct! Correct!
(c) LIFO: Units Cost Total
500 $5 2,500$
140 $6 840
Ending inventory 640 3,340$
(d) Specific identification: Units Cost Total
130 $5 650$
350 $6 2,100
160 $8 1,280
(a) Weighted-average: Units Amount
Totals 1,260 7,380$
Ending inventory 3,750$ «- Good Job!
Student Name:
Class:
Requirement 1:
McGraw-Hill/Irwin
Instructor
Problem 07-03
Requirement 2:
FIFO reports a higher pretax income than LIFO because (1) prices are rising and (2) FIFO allocates the old
(lower) unit costs to cost of goods sold. For the same reason, FIFO will report a higher EPS amount because it
produces a higher pretax income than LIFO.
Requirement 3:
Requirement 4:
Because LIFO reports a lower pretax income than FIFO for the reasons given in Requirement (2), the former
will derive less income tax by ($6,700 – $5,880) X 30% = $246.
LIFO will provide a more favorable cash flow than FIFO of $246 because less cash will be paid for income tax
in the current year than would be paid under FIFO (for the reasons given in Requirements 2 and 3).
Transactions Units Amount
Inventory, January 1, 2011 500 2,500$
Given Data P07-03:
Student Name:
Class:
Requirement 1:
Prices Rising Prices Falling
FIFO LIFO FIFO LIFO
Sales revenue (500 units) 15,000$ 15,000$ 15,000$ 15,000$
Cost of goods sold:
Beginning inventory (300 units) 3,300 3,300 3,600 3,600
Purchases (400 units) 4,800 4,800 4,400 4,400
Problem 07-05
McGraw-Hill/Irwin
Instructor
Comparison Income Statements
INVENTORY
Student Name:
Class:
Problem 07-05
McGraw-Hill/Irwin
Instructor
Requirement 2:
Requirement 3:
The above tabulation demonstrates that when prices are rising, FIFO gives a higher net
income than LIFO. When prices are falling, the opposite effect results. The difference in
pretax income (as between FIFO and LIFO) is the same as the difference in cost of goods
sold but in the opposite direction. The difference in net income (i.e., after tax) is equal to the
difference in cost of goods sold multiplied by one minus the income tax rate.
Requirement 4:
When prices are rising, LIFO derives a more favorable cash position (than FIFO) equal to the
Prices Rising Prices Falling
Situation A Situation B Situation C Situation D
FIFO LIFO FIFO LIFO
Sales revenue $15,000 $15,000 $15,000 $15,000
Cost of goods sold:
Beginning inventory 3,300 ? ? ?
Purchases 4,800 ? ? ?
Data common to all 4 situations:
Sales in units 500
Per Number
Data for Situations A and B (Prices Rising) Unit of Units Total
Beginning inventory 11$ 300 3,300$
Purchases 12$ 400 4,800
Per Number
Data for Situations C and D (Prices Falling) Unit of Units Total
Given Data P07-05:
Student Name:
Class:
Requirement 1:
Income tax expense 11,655
Net income $27,195
Correct!
Computation of ending inventory on LCM basis:
LCM
Item Quantity Valuation
A3,050 X$3.0 =$9,150 X$4.0 =$12,200 $9,150
Correct!
Requirement 2:
Instructor
Income Statement (LCM basis)
HARVEY COMPANY
Original cost
Cost (Market)
Replacement
For the Year Ended December 31, 2011
Problem 07-06
McGraw-Hill/Irwin
Amount
Ending inventory Correct!
Cost of goods sold Correct!
Gross profit Correct!
100,850
(Decrease)
of Change
Item Changed
Cost Basis
FIFO
Basis
LCM
8,650
($8,650)
(8,650)
170,500
$46,500
179,150
$37,850
109,500
(6,055)
(2,595)
(8,650)
Requirement 3:
Requirement 4:
LCM reduced pretax income and income tax expense. There was a cash savings of $2,595 for 2011
(assuming the LCM results are included on the income tax return). In subsequent periods pretax income will
The inventory costing methods (average cost, FIFO, LIFO, and specific identification) apply the cost and
matching principles. Cost of goods sold, under these principles, is the actual cost incurred for the
Sales Revenue 280,000$
Cost of goods sold
Beginning inventory 33,000$
Purchases 184,000
Current
Replacement
Unit Cost
Item Quantity Unit Total (Market)
A3,050 $3.0 $9,150 $4.0
Given Data P07-06:
Acquisition
Cost
HARVEY COMPANY
Income Statement
December 31, 2011
Student Name:
Class:
Requirement 1:
2011 2012 2013 2014
Sales revenue 2,025,000$ 2,450,000$ 2,700,000$ 2,975,000$
Correct! Correct! Correct! Correct!
Requirement 2:
2011 2012 2013 2014
Before correction 0.26 0.34 0.34 0.29
Correct! Correct! Correct! Correct!
After correction 0.26 0.33 0.35 0.29
Correct! Correct! Correct! Correct!
Requirement 3:
2012 2013
Effect of Error on Income Tax Expense
PRUITT COMPANY
Problem 07-09
McGraw-Hill/Irwin
Instructor
Income Statement Corrected
PRUITT COMPANY
Gross Profit Ratio
PRUITT COMPANY
2011 2012 2013 2014
Sales revenue 2,025,000$ 2,450,000$ 2,700,000$ 2,975,000$
Cost of goods sold 1,505,000 1,627,000 1,782,000 2,113,000
Income Statement – Uncorrected
PRUITT COMPANY
Given Data P07-09: