Nice Question on FIFO/LIFO

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ruhi22

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While attending a local college, music major Anjolie Webster accepts a temporary position with a small manufacturing firm. Currently, the firm uses LIFO to account for inventory, but the owner is �just curious� about how the financial results would look if the company used FIFO. Before the owner leaves for her voice lesson, she hands Webster a photocopy of the inventory data for the current period (summarized below).

Beginning inventory of 1,000 units at $30 cost.

Ending inventory of 800 units.

Sales of 1,100 units.

Three inventory purchases (listed from earliest purchase to latest purchase): 400 units at $27 each, 300 units at $25 each, and an unreadable number of units at $22 each. (Unfortunately, when the owner copied the original document, she left a yellow sticky note covering some of the inventory information.)

Current assets (less inventory) of $75,000.

Current liabilities of $65,000.

Using the information provided, determine which of the following statements is least accurate? All else equal, compared to LIFO, using FIFO would result in:

A) a lower gross margin.

B) a lower ending inventory balance.

C) a current ratio of approximately 1.60.

D) cost of goods sold of $32,700.
 
Okay, one hint: PRICES ARE FALLING. So reverse all your thinking.
 
A) a lower gross margin. ?

just guessing
too tired to make calculation
 
C
All of the others are right, and I'm getting a FIFO inventory # of 20k (200 x 22 + 300 x 25 + 300 x 27) since we're left with 800 units and they'd be the last ones. So add 20k to CA of 75k and calculate CA/CL = 95/65 = 1.4615

C is wrong
 
Hello everyone,

I just finished going through all the material yesterday so now I'm in the process of doing test exams and a lot of practice material.

For this one I'd go for A as well. I cannot calculate the current ratio because I don't know the last number of units bought so I haven't got a valuation for inventory. Cost of goods sold should be 32,100 and when prices fall, COGS would be higher under FIFO, so gross income would be lower.

I'd be happy to hear the correct answer!
 
Beginning inventory of 1,000 units at $30 cost.
Ending inventory of 800 units.
Sales of 1,100 units.

You should be able to back into that last #, no? If you started with 1000, you wound up with 800 and you sold 1100, you had to purchase 900 units. so it tells you you bought 400 and 300 and x... x must be 200 units, or am i crazy?
 
Hm good point.

Then still, when prices decline it does not affect the number of units in inventory. When prices fall, FIFO will always result in lower inventory balance because you include the expensive units in the COGS so then B would be correct.

Thing is that A looks good as well?

(Help?)
 
Jeez, this is 4th grade stuff. Let me rephrase it.

Johnny woke up one morning with a basket of 100 apples.

He went to Billy's store and bought 70 apples.

He went to Sam's store and bought some more apples.

He sold 110 apples and had 80 apples left.

How many apples did he buy at Sam's store?

I dropped a zero and combined 2 purchases because I thought it might be too tough.

Hint:

BI+P-EI=CGS or...
BI+P=CGS +EI


once you you calc the missing purchase, figure out EI and CGS priced both ways

(Nice job on the calc, bannisja...except for the self doubt in the last sentance)
 
i'll take backhanded compliments over no compliments any old day, thx!
 
Think that the answer is C

I always go nuts from this LEAST accurate type of qst! I read it alright but by the time I got to solving the questions I forget it :(
 
A is right, D is right.

C is wrong but nearly right.

B looks wrong. Can someone explain why the inventory balance would be anything other than 800 under FIFO?
 
How do you know if they mean balance by value or by volume?
 
mek Wrote:
-------------------------------------------------------

> B looks wrong. Can someone explain why the
> inventory balance would be anything other than 800
> under FIFO?

and

> How do you know if they mean balance by value or by volume?

Units are the same under all methods, only the dollars that you attach to them are different.
 
Assuming balance of inventory refers to the value of inventory put on the balance sheet, then the answer is C.
 
C -- least accurate;

Current Assets ( 75,000 + 20,000) / Current Liabilities (65,000) = 1.462
 
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