fsa2-2

Beginning inventory: 200 units @$10/unit = $2,000

Units sold: 100 units per quarter for a total of 400 units

Ending inventory (units): 200 +500 - 400 units = 300 units

Rising Prices

Rising Prices

Quarter

Purchases
Units

Unit
Cost

Purchases
Dollars

Unit
Cost

Purchases
Dollars

1

100

$10 

$1,000 

$11 

$1,100 

2

150

$10 

$1,500 

$12 

$1,800 

3

150

$10 

$1,500 

$13 

$1,950 

4

100

$10 

$1,000 

$14 

$1,400 

Total

500

$5,000 

$6,250 

BI+P=

$7,000 

BI+P=

$8,250 

Inventory
method

COGS

EI

COGS

EI

FIFO

$4,000 

$3,000 

$4,300 

$3,950 

Weighted average

$4,000 

$3,000 

$4,714 

$3,536 

LIFO

$4,000 

$3,000 

$5,150 

$3,100 

Assuming that 400 units are sold for $10,000 (average price of $25) with tax rate of 40%

FIFO

LIFO

Differences
(LIFO - FIFO)

Sales

$10,000 

$10,000 

$0 

COGS

($4,300)

($5,150)

$850 

Income before tax

$5,700 

$4,850 

($850)

Income tax @40%

($2,280)

($1,940)

($340)

Net income

$3,420 

$2,910 

($510)

If we assume that sales are for cash and payments for purchases and taxe are made immediately

FIFO

LIFO

Differences
(LIFO - FIFO)

Sales inflow

$10,000 

$10,000 

$0 

Purchases

($6,250)

($6,250)

$0 

Inflows before tax

$3,750 

$3,750 

$0 

Income tax paid

($2,280)

($1,940)

($340)

Operating cash flow

$1,470 

$1,810 

$340 

Then the balance sheet account becomes

FIFO

LIFO

Differences
(LIFO - FIFO)

Cash

$1,470 

$1,810 

$340 

Inventroy

$3,950 

$3,100 

($850)

Working capital

$5,420 

$4,910 

($510)

Retained earnings

$3,420 

$2,910 

($510)