Question

A snowmobile manufacturer that uses LIFO begins the year with an inventory of 3,000 snowmobiles, at a carrying cost of $4,000 each. In January, the company sells 2,000 snowmobiles at a price of $10,000 each. In July, the company adds 4,000 snowmobiles to inventory at a cost of $5,000 each. Compared to using a perpetual inventory system, using a periodic system for the firm's annual financial statements would:

Answer 1

Step-by-step explanation:

To determine the impact on the company's financial statements when using a LIFO (Last In, First Out) inventory system compared to a perpetual inventory system, we need to calculate the cost of goods sold (COGS) and ending inventory under LIFO.

Under the LIFO method, the most recently acquired inventory is assumed to be sold first. In this case, the company added 4,000 snowmobiles in July at a cost of $5,000 each, which will be considered as the most recent inventory. Let's calculate the financial statement components:

Cost of Goods Sold (COGS):

Since the company sold 2,000 snowmobiles in January, we will consider the 2,000 most recent snowmobiles acquired in July at a cost of $5,000 each, resulting in a total COGS of 2,000 * $5,000 = $10,000,000.

Ending Inventory:

To calculate the ending inventory, we need to determine the number of snowmobiles remaining after the January sales. The beginning inventory was 3,000 snowmobiles, and 2,000 were sold, leaving 1,000 snowmobiles in inventory.

The company then added 4,000 snowmobiles in July, resulting in a total of 1,000 + 4,000 = 5,000 snowmobiles in inventory. Considering the most recent purchases under LIFO, the ending inventory would be 5,000 snowmobiles * $5,000 = $25,000,000.

Now, let's compare the financial statement components under a perpetual inventory system and a LIFO system:

Income Statement:

a. Revenue: The revenue remains the same at 2,000 snowmobiles * $10,000 = $20,000,000.

b. Cost of Goods Sold (COGS): Under a perpetual inventory system, the COGS would have been calculated based on the actual cost of the units sold. However, under LIFO, the COGS is higher at $10,000,000 compared to the perpetual system.

c. Gross Profit: Gross profit would be Revenue - COGS, which in this case would be $20,000,000 - $10,000,000 = $10,000,000.

Balance Sheet:

a. Inventory: Under a perpetual inventory system, the ending inventory would have been valued at the actual cost of the remaining 5,000 snowmobiles, which would have been $20,000,000 (5,000 snowmobiles * $4,000 each). However, under LIFO, the ending inventory is valued at $25,000,000.

b. Other financial statement components (e.g., assets, liabilities, equity) would remain unaffected by the choice of inventory valuation method.