The Washington Corporation is currently using first-in, first-out (FIFO) method of inventory valuation. The president wants to know the effect of a change in inventory valuation method from first-in, first-out (FIFO) to last-in, first-out (LIFO) method.

Washington Corporation makes the following information available to you for the year 2013:

Sales 42,000 units @ $100 each
Inventory on January 1, 2013 12,000 units @ $40 each
Purchases made during the year 2013
     On 15 January 2013 12,000 units @ $44 each
     On 25 June 2013 20,000 units @ $50 each
     On 20 December 2013 14,000 units @ $60 each

A physical count was made on December 31, 2013 and 16,000 units were found in inventory.  The total operating expenses of $400,000 were paid during the year 2013.

Required: Prepare a comparative income statement using FIFO and LIFO method for the president of Washington Corporation.

FIFO LIFO
Sales 4,200,000 4,200,000
Less cost of goods sold:
Beginning inventory 480,000 480,000
Add purchases* 2,368,000 2,368,000
————- ————-
Cost of goods available for sale 2,848,000 2,848,000
Less ending inventory** 940,000 1,908,000 656,000 2192,000
————- ————- ————- ————-
Gross profit 2,292,000 2,008,000
Less operating expense 400,000 400,000
————- ————-
1,892,000 1,608,000
————- ————-

 

*Purchases:
12,000 units × $44
$528,000
20,000 units × $50
$1,000,000
14,000 units × $60
$840,000
————-
$2,368,000
————-
**Ending inventory:
Under FIFO:
14,000 units × $60 $840,000
2,000 units × $50  $100,000
 ————-
$940,000
————-
Under LIFO:
12,000 units × $40 $480,000
4,000 units × $44 $176,000
————-
$656,000
————-

Notice that the gross profit and net operating income under FIFO is higher than LIFO. When prices of the goods rise, FIFO usually produces higher gross and net income than LIFO.