Exercise-10 (FIFO and LIFO based income statement)

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 2016:

  • Sales: 42,000 units @ $100 each
  • Inventory on January 1, 2013: 12,000 units @ $40 each
  • Units purchased on January 15, 2013: 12,000 units @ $44 each
  • Units purchased on June 25, 2013: 20,000 units @ $50 each
  • Units purchased on December 20, 2013: 14,000 units @ $60 each

A physical count was made on December 31, 2016 and 16,000 units were found in inventory.  The total operating expenses of $400,000 were paid during the year 2016.

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

Solution

exercise-10-icm-img1

*Purchases:

= (12,000 units × $44) + (20,000 units × $50) + (14,000 units × $60)

= $528,000 + $1,000,000 + $840,000

= $2,368,000

**Ending inventory:

i. Periodic-FIFO: (14,000 units × $60) + (2,000 units × $50)

= $840,000 +  $100,000

= $940,000

ii. Periodic-LIFO: (12,000 units × $40) + (4,000 units × $44)

= $480,000 + $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.

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One Thought on Exercise-10 (FIFO and LIFO based income statement)

  1. Michael McKenzie

    You guys have got the ending inventories for LIFO and FIFO the wrong way around

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