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There are 3 assignments: 1. Flying Tomato sells a snowboard, WhiteOut, that is popular with snowboard enthusiasts. Presented below is information relating to Flying Tomato’s purchases of WhiteOut snowboards during September. During the same month, 121 WhiteOut snowboards were sold at $170 each. Flying Tomato uses a periodic inventory system.

Date Explanation Units Unit Cost Total Cost Sept. 1 Inventory 25 $100 $2,500 Sept. 12 Purchases 77 150 11,550 Sept. 19 Purchases 40 140 5,600 Sept. 26 Purchases 44 130 5,720 Totals 144 $15,510

Instructions: (a) Compute the ending inventory at September 30 and cost of goods sold using the FIFO and LIFO methods. Prove the amount allocated to cost of goods sold under each method. (b) For both FIFO and LIFO, calculate the sum of ending inventory and cost of goods sold. What do you notice about the answers you found for each method? (c) What is gross profit under each method? (d) Which method results in a larger amount reported for assets on the balance sheet? Which results in a larger amount reported for owner’s equity on the balance sheet? Part 2 is to answer, in paragraph form, the following question: FIFO and LIFO are the two most common cost flow assumptions made in costing inventories. The amounts assigned to the same inventory items on hand may be different under each cost flow assumption. If a company has no beginning inventory, explain the difference in ending inventory values under the FIFO and LIFO cost bases when the price of inventory items purchased during the period have been (1) increasing, (2) decreasing, and (3) remained constant.

Paper For Above instruction

The presentation of inventory costs plays a critical role in financial reporting, influencing key financial metrics such as gross profit, net income, and asset valuation. Among the predominant methods used to assign costs to inventory and Cost of Goods Sold (COGS) are FIFO (First-In, First-Out) and LIFO (Last-In, First-Out). When a company has no beginning inventory, these methods yield different outcomes based on the trend in purchase prices during the period: increasing, decreasing, or remaining constant. This essay explores these differences in detail, illustrating their implications for financial analysis and managerial decision-making.

Inventory Costing Methods and Their Impact

Under the FIFO method, inventory costs are assigned starting with the earliest (first) purchases, moving forward to the most recent. This means that the inventory on hand at the end of the period comprises the most recent purchases, thus reflecting current market prices more accurately. Conversely, LIFO assigns the most recent costs to COGS, leaving older costs in inventory. In a scenario where there is no beginning inventory, the effect of these methods becomes highly dependent on price trends across the purchasing periods.

Effect of Increasing Prices

When the purchase prices during the period are increasing, FIFO results in a lower COGS because the earliest, and usually cheaper, costs are assigned to sales first. Since the most recent, higher costs remain in inventory, the ending inventory valuation is higher. Conversely, LIFO assigns the latest, higher costs to COGS, yielding a higher COGS figure and a lower ending inventory. This scenario benefits companies in terms of tax advantages during inflationary periods because higher COGS reduces taxable income and net income. The divergence here underscores how inventory valuation methods can significantly influence profitability metrics and taxable income.

Effect of Decreasing Prices

In the case where purchase prices are decreasing, the pattern reverses. FIFO assigns older, higher costs to COGS, resulting in higher COGS and lower ending inventory. LIFO, on the other hand, assigns the latest, lower costs to COGS, resulting in lower COGS and higher ending inventory. This situation can inflate profits under LIFO, as the inventory on balance sheets reflects more recent, lower costs, thereby increasing assets and owner’s equity. Businesses in deflationary environments should consider the effects of inventory valuation methods on financial statements carefully.

Effect of Constant Prices

When the prices of inventory items remain constant throughout the period, the choice of inventory costing method has little impact on the ending inventory value and COGS. Both FIFO and LIFO yield the same results because the costs assigned are identical regardless of the sequence of inventory flows. Therefore, in stable price environments, the selection of inventory costing methods exerts minimal influence on the company's reported financial position or profitability.

Implications for Financial Reporting and Decision-Making

The selection of FIFO or LIFO affects not only the reported financial statements but also managerial strategies, tax liabilities, and perceptions by investors and creditors. During periods of rising prices, FIFO tends to inflate inventory values and net income, which can be favorable for presenting a stronger asset base and profitability. Conversely, LIFO can provide tax benefits in inflationary times due to higher COGS. Understanding these differences, particularly in companies with no beginning inventory, is vital for accurate financial analysis, compliance with accounting standards, and strategic planning.

Conclusion

In conclusion, the choice between FIFO and LIFO significantly influences inventory valuation, COGS, and ultimately, profitability and asset figures. With no beginning inventory, these effects are magnified, especially during periods of price fluctuations. Companies must consider the financial environment, regulatory standards, and their strategic objectives when selecting an inventory costing method, recognizing that each approach offers distinct advantages and disadvantages tailored to specific economic conditions.

References

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