Question

Allen company uses LIFO for financial reporting purposes and FIFO for internal reporting purposes. Its LIFO reserve balance is $80,000 as of 12/31/2020 and $90,000 as of 12/31/2021. What is the amount of cost of goods sold reported in 2021?

Answer 1

The 2021 COGS for Allen company can be found by adding the $10,000 increase in the LIFO reserve to the COGS under FIFO. The sales revenue and expenses given in the self-check question result in an accounting profit of $50,000 for the firm last year.

Step-by-step explanation:

The question posed involves LIFO reserve and FIFO accounting methods employed by Allen company, which are used to determine cost of goods sold (COGS). To ascertain the amount of COGS reported in 2021, one can analyze the change in the LIFO reserve from the beginning of the year to the end. The LIFO reserve increased from $80,000 at the end of 2020 to $90,000 at the end of 2021. This increment of $10,000 represents the additional cost that would have been recorded under LIFO compared to FIFO during the year. Therefore, to calculate COGS under LIFO, we would add this $10,000 increase to the COGS calculated under FIFO for the same period.

Regarding the self-check question about a firm's accounting profit, to determine this you subtract the total expenses from the sales revenue. The firm spent $950,000 in total expenses (labor, capital, materials) which is subtracted from the sales revenue of $1 million. Thus, the firm's accounting profit was $50,000 for the last year.