Chapter 7 Reporting and Interpreting Cost of Goods Sold and Inventory 1 Broadhead Company uses a periodic inventory system At the end of the annual accounting period December 31 2015 the accounting records provided the following information for product 2 Prepare a separate income statement through pretax income that details cost of goods sold for a Case A FIFO and b Case B LIFO BROADHEAD COMPANY Income Statement For the Year ended December 21 2015 Case A FIFO Case B LIFO Compute the difference between the pretax income and the ending inventory amount for the two cases Difference Pretax income Ending inventory Which inventory costing method may be preferred for income tax purposes 2 Daniel Company uses a periodic inventory system Data for 2015 beginning merchandise inventory December 31 2014 2 000 units at 38 purchases 8 000 units at 40 expenses excluding income taxes 194 500 ending inventory per physical count at December 31 2015 1 800 units sales 8 200 units sales price per unit 75 and average income tax rate 30 percent Compute cost of goods sold and prepare income statements under the FIFO LIFO and average cost inventory costing methods Inventory Costing Method Units FIFO LIFO Average Cost Cost of Goods Sold Beginning inventory Purchases Goods available for sale Ending inventory Cost of goods sold Income Statement FIFO LIFO Average Cost Between FIFO and LIFO which method is preferable in terms of a net income and b income taxes paid cash flow Net income Income taxes paid Between FIFO and LIFO which method is preferable in terms of a net income and b income taxes paid cash flow assuming that prices were falling 3 Following is partial information for the income statement of Audio Solutions Company under three different inventory costing methods assuming the use of a periodic inventory system Compute cost of goods sold under the FIFO LIFO and average cost inventory costing methods Cost of Goods Sold Beginning inventory 400 units Purchases 475 units Goods available for sale Ending inventory 525 units Cost of goods sold Inventory Costing Method LIFO 11 200 16 625 Average Cost 11 200 16 625 FIFO 11 200 16 625 Prepare an income statement through pretax income for each method Sales 350 units unit sales price 50 Expenses 1 700 Income Statement FIFO LIFO Average Cost Rank the three methods in order of income taxes paid favorable cash flow 1 2 3 4 Dell Inc is the leading manufacturer of personal computers In a recent year it reported the following in dollars in millions Inventory turnover Average days to sell inventory 5 The income statement for Pruitt Company summarized for a four year period shows the following An audit revealed that in determining these amounts the ending inventory for 2015 was overstated by 18 000 The company uses a periodic inventory system Prepare the income statements to reflect the correct amounts taking into consideration the inventory error Income Statement For the 4 year period 2015 2014 2016 2017 Cost of Goods Sold Beginning inventory 400 units Purchases 475 units Goods available for sale Ending inventory 525 units Cost of Goods Sold Before correction After correction 2015 2016 Compute the gross profit percentage for each year before the correction and after the correction 2014 2015 2016 2017 Income tax expense What effect would the error have had on the income tax expense assuming a 30 percent average rate Increasing costs normal financial statement effects FIFO LIFO Cost of goods sold on income statement Net income Income taxes Inventory on balance sheet Chapter 7 Reporting and Interpreting Cost of Goods Sold and Inventory 1 Broadhead Company uses a periodic inventory system At the end of the annual accounting period December 31 2015 the accounting records provided the following information for product 2 Prepare a separate income statement through pretax income that details cost of goods sold for a Case A FIFO and b Case B LIFO BROADHEAD COMPANY Income Statement For the Year ended December 21 2015 Case A FIFO Case B LIFO 500 000 500 000 27 000 195 000 222 000 125 000 27 000 195 000 222 000 87 000 97 000 403 000 195 000 135 000 365 000 195 000 Sales revenue Cost of goods sold Beginning inventory Purchases Goods available for sale Ending inventory Cost of goods sold Gross profit Operating expenses Difference Pretax income 38 000 Ending inventory 38 000 Compute the difference between the pretax income and the ending inventory amount for the two cases Which inventory costing method may be preferred for income tax purposes LIFO 2 Daniel Company uses a periodic inventory system Data for 2015 beginning merchandise inventory December 31 2014 2 000 units at 38 purchases 8 000 units at 40 expenses excluding income taxes 194 500 ending inventory per physical count at December 31 2015 1 800 units sales 8 200 units sales price per unit 75 and average income tax rate 30 percent Compute cost of goods sold and prepare income statements under the FIFO LIFO and average cost inventory costing methods Cost of Goods Sold Beginning inventory Purchases Goods available for sale Ending inventory Cost of goods sold Income Statement Sales revenue Cost of goods sold Gross profit Operating expenses Pretax income Income tax expense Units 2 000 8 000 10 000 1 800 8 200 FIFO 615 000 324 000 291 000 194 500 96 500 28 950 Inventory Costing Method FIFO 76 000 320 000 396 000 72 000 324 000 LIFO 76 000 320 000 396 000 68 400 327 600 Average Cost 76 000 320 000 396 000 71 280 324 720 LIFO 615 000 327 600 287 400 194 500 92 900 27 870 Average Cost 615 000 324 720 290 280 194 500 95 780 28 734 Net income 67 550 65 030 67 046 Between FIFO and LIFO which method is preferable in terms of a net income and b income taxes paid cash flow Net income Income taxes paid FIFO LIFO Between FIFO and LIFO which method is preferable in terms of a net income and b income taxes paid cash flow assuming that prices were falling When prices are falling the opposite effect occurs LIFO produces higher net income and less favorable cash flow than does FIFO Cost of Goods Sold Beginning inventory 400 units Purchases 475 units Goods available for sale Ending inventory 525 units Inventory Costing Method LIFO 11 200 16 625 27 825 15 575 FIFO 11 200 16 625 27 825 18 025 Average Cost 11 200 16 625 27 825 16 695 3 Following is partial information for the income statement of Audio Solutions Company under three different inventory costing methods assuming the use of a periodic inventory system Compute cost of goods sold under
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