inventory accounting

Topics: Inventory, FIFO and LIFO accounting, Revenue Pages: 32 (2391 words) Published: November 28, 2013
Inventory Valuation

1

Lewis Corporation
Case: 6-2
Page: 173
2

Lewis Corporation
Traditionally used inventory valuation method:
FIFO
Uses periodic inventory system

3

Inventory Transaction 2005-2007
No. of Cartons Price per Carton
2005 2006 2007 2005 2006 2007
Beginning balance 1840 1020 1040 $20.00
Purchases
600 700 1000 $20.25 $21.50 $22.50
800 700 700 $21.00 $21.50 $22.75
400 700 700 $21.25 $22.00 $23.00
200 1000 700 $21.50 $22.25 $23.50
Sales
2820 3080 2950 $34.00 $35.75 $35.75
4

Discussion Question
Calculate the cost of goods sold and year-end
inventory amounts for 2005, 2006, and 2007
using..,
• FIFO
• LIFO
• Average cost method

5

Cartons
2005
Cost of goods sold

Inventory

2006
Cost of goods sold

Inventory

2007
Cost of goods sold

Inventory

1840
600
380

2820
420
400
200
1020

FIFO
Price
$20.00
$20.25
$21.00

$36,800.00
$12,150.00
$7,980.00

$21.00
$21.25
$21.50

$56,930.00
$8,820.00
$8,500.00
$4,300.00
$21,620.00

420
400
200
700
700
660
3080
40
1000
1040

$21.00
$21.25
$21.50
$21.50
$21.50
$22.00

40
1000
1000
700
210
2950
490
700

$22.00
$22.25
$22.50
$22.75
$23.00

1190

Value

Inventory Valuation
LIFO
Cartons Price

$22.00
$22.25

$23.00
$23.50

$8,820.00
$8,500.00
$4,300.00
$15,050.00
$15,050.00
$14,520.00
$66,240.00
$880.00
$22,250.00
$23,130.00
$880.00
$22,250.00
$22,500.00
$15,925.00
$4,830.00
$66,385.00
$11,270.00
$16,450.00
$27,720.00

200
400
800
600
820
2820
1020

$21.50
$21.25
$21.00
$20.25
$20.00

Value

Average Cost
Cartons Price
Value

$4,300.00
$8,500.00
$16,800.00
$12,150.00
$16,400.00
$58,150.00
$20,400.00

2820
1020

$20,400.00

1020

$22.25
$22.00
$21.50
$21.50

$22,250.00
$15,400.00
$15,050.00
$14,620.00

3080

3080
20
1020
1040

$21.50
$20.00

$67,320.00
$430.00
$20,400.00
$20,830.00

3080
1040

700
700
700
850

$23.50
$23.00
$22.75
$22.50

$16,450.00
$16,100.00
$15,925.00
$19,125.00

2950

$22.55

$66,513.65

2950
1020
20
150
1190

$20.00
$21.50
$22.50

$67,600.00
$20,400.00
$430.00
$3,375.00
$24,205.00

2950
1190

$22.55

$66,513.65
$26,830.93

$20.00

1020
1000
700
700
680

2820

$20.46

$57,685.92

$20.46

$57,685.92
$20,865.12

$20,865.12
$21.51

$66,247.72

$21.51

$66,247.72
$22,369.36

1040

1190

$22,369.36

6

$26,830.93

FIFO vs. LIFO vs. Average Cost
Check on Calculation
FIFO
LIFO
Cost of goods sold
2005
2006
2007
Inventory - 2007

$56,930.00
$66,240.00
$66,385.00
$27,720.00
$217,275.00

Average Cost

$58,150.00 $57,685.92
$67,320.00 $66,247.72
$67,600.00 $66,513.65
$24,205.00 $26,830.93
$217,275.00 $217,278.22
7

Discussion Question
Lewis corporation is considering switching from
FIFO to LIFO to reduce its income tax
expense
Assuming a corporate income tax rate of 40%,
calculate the tax savings this would have made
for 2005 to 2007
Would you recommend and Lewis make this
change?
8

Tax Expense Benefit
FIFO
LIFO
2005
2006
2007
2005
2006
2007
Sales
$95,880.00 $110,110.00 $105,462.50 $95,880.00 $110,110.00 $105,462.50 Cost of goods sold
$56,930.00 $66,240.00 $66,385.00 $58,150.00 $67,320.00 $67,600.00 Gross margin
$38,950.00 $43,870.00 $39,077.50 $37,730.00 $42,790.00 $37,862.50 Tax expense
$15,580.00 $17,548.00 $15,631.00 $15,092.00 $17,116.00 $15,145.00 Net income
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