Chapter 8 Assignment Exercise 81 FIFO And LIFO Inventory Stu

Chapter 8 Assignment Exercise 81fifo And Lifo Inventory Study The Fi

Study the FIFO and LIFO explanations in the chapter. Use the format in Exhibit 8–1 to compute the ending FIFO inventory and the cost of goods sold, assuming $90,000 in sales; beginning inventory 500 units @ $50; purchases of 400 units @ $50; 100 units @ $65; 400 units @ $80. Also compute the cost of goods sold percentage of sales. Use the format in Exhibit 8–2 to compute the ending LIFO inventory and the cost of goods sold, using same assumptions. Also compute the cost of goods sold percentage of sales. Comment on the difference in outcomes.

Paper For Above instruction

The comparative analysis of FIFO (First-In, First-Out) and LIFO (Last-In, First-Out) inventory valuation methods is essential for understanding their impact on a company’s financial statements and tax liabilities. Both methods influence the cost of goods sold (COGS), ending inventory valuation, and ultimately, profitability and cash flow. This paper evaluates the results of applying FIFO and LIFO using given inventory data, highlighting key differences and their implications.

Under FIFO, inventory costs are based on the assumption that the oldest inventory items are sold first. Using the provided data, beginning inventory comprises 500 units at $50 each, with subsequent purchases of 400 units at $50, 100 units at $65, and 400 units at $80. Assuming sales of $90,000, the FIFO method calculates ending inventory by valuing the remaining inventory with the most recent purchase prices. Conversely, COGS is derived from the oldest inventory costs first. This results in a different valuation compared to LIFO, which assumes the most recent inventory costs are sold first.

Applying FIFO, the ending inventory consists predominantly of the most recent purchases, notably units at $80 and $65. The calculation begins by determining the number of units sold based on sales revenue and unit costs, which necessitates converting sales figures into units. Given the total units purchased and their associated costs, FIFO assigns the earliest costs to COGS, with the remaining units valued at current prices. This generally results in a higher ending inventory value during periods of rising prices because recent, higher costs are retained in inventory. The resulting COGS under FIFO tends to be lower in an inflationary environment.

In contrast, LIFO assumes that the most recent purchase costs are allocated to COGS, which typically inflates COGS during periods of rising prices and reduces taxable income. The ending inventory, under LIFO, comprises the older, lower-cost units remaining from the beginning inventory and earlier purchases. When calculating LIFO, the newer, higher-cost units are expensed first, leading to a potentially lower net income but advantageous tax implications in inflationary periods.

The actual numerical calculations involve detailed step-by-step procedures, which provide concrete insights into how inventory valuation changes the financial statements. For instance, under FIFO, the ending inventory valuation may be significantly higher, reflecting recent price increases (units at $80 and $65). Meanwhile, LIFO end-of-period inventory valuation might be considerably lower, affecting balance sheet strength and profitability metrics.

The percentage of COGS relative to sales further emphasizes how inventory valuation methods influence financial results. FIFO often results in a smaller COGS percentage during inflation, suggesting higher gross profit margins, while LIFO tends to produce a higher COGS percentage, reducing gross profit margins. These differences can influence managerial decisions, investor perception, and tax planning strategies.

In conclusion, the choice of inventory valuation method has substantial implications. FIFO offers a balance sheet advantage with higher inventory valuation during inflation, enriching asset reports. Conversely, LIFO provides tax advantages and a more conservative view of inventory value. Companies must consider their financial goals, tax strategies, and the nature of their inventory costs when selecting between FIFO and LIFO.

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