Question

The management of Tamarisk, Inc. asks your help in determining the comparative effects of the FIFO and LIFO inventory cost flow methods. For 2020, the accounting records provide the following data.

Inventory, January 1 (19,500 units) $87,750
Cost of 195,000 units purchased 1,037,400
Selling price of 156,000 units sold 1,365,000
Operating expenses 132,000
Units purchased consisted of 68,250 units at $5.10 on May 10; 68,250 units at $5.30 on August 15; and 58,500 units at $5.60 on November 20. Income taxes are 30%.

Prepare comparative condensed income statements for 2020 under FIFO and LIFO.

Answer 1

Net Income (FIFO) 304815 (LIFO) 276150

Step-by-step explanation:

Tamarisk, Inc.

Comparative Income Statement

FIFO LIFO

Sales 1,365,000 1,365,000

Cost of Goods Sold 797550 838500

Gross Profit 567450 526,500

Operating expenses 132,000 132,000

NEt Income Before Tax 4355350 394500

Income Tax (30%) 130365 118350

Net Income 304815 276150

If we analyze we see that the Gross Profit under LIFO is less as LIFO COGS is more. Similarly tax under LIFO is Less as compared to FIFO Tax because the income for FIFO is more as compared to LIFO.

Working

Units Purchases Total Cost

Beginning Inventory 19,500 units at$4.5 $87,750

May 10 68,250 units at $5.10 ; 348075

August 15 68,250 units at $5.30 ; 361725

November 20 58,500 units at $5.60 ; 327600

IF FIFO is used then COGS= 68,250 units at $5.10+ 68,250 units at $5.30+ 19,500 units at $4.50 = 348075 + 361725+ 87750= 797550

If LIFO is used Then COGS is =58,500 units at $5.60+ 68,250 units at $5.30 +29,250 units at $5.10= 327600+ 361725+149175= 838500

Selling price of 156,000 units sold 1,365,000

Sale Unit Price = 1,365,000 / 156,000=$ 8.75

Cost of 195,000 units purchased 1,037,400

Operating expenses 132,000

Income taxes are 30%.