week 3 solutions - PROBLEM64A STAMPFER,INC....

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PROBLEM 6-4A (a) STAMPFER, INC. Condensed Income Statements For the Year Ended December 31, 2007 FIFO LIFO Sales ......................................................................... $730,000 $730,000 Cost of goods sold Beginning inventory. ............................................ 35,000 35,000 Cost of goods purchased. .................................... 480,000 480,000 Cost of goods available for sale. ......................... 515,000 515,000 Ending inventory. .................................................. 136,000 a 109,000 b Cost of goods sold. ............................................... 379,000 406,000 Gross profit. .................................................................. 351,000 324,000 Operating expenses. .................................................... 120,000 120,000 Income before income taxes. ...................................... 231,000 204,000 Income tax expense (28%). .......................................... 64,680 57,120 Net income. ................................................................... $166,320 $146,880 a (25,000 @ $4.66) + (5,000 @ $3.90) = $136,000. b (10,000 @ $3.50) + (20,000 @ $3.70) = $109,000. (b) Answers to questions:
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(1) The FIFO method produces the most meaningful inventory amount for the balance sheet because the units are costed at the most recent purchase’s cost. (2) The LIFO method produces the most meaningful net income because the costs of the most recent purchases are matched against sales. (3) The FIFO method is most likely to approximate actual physical flow because the oldest goods are usually sold first to minimize spoil-age and obsolescence. (4) There will be $7,560 additional cash available under LIFO because income taxes are $57,120 under LIFO and $64,680 under FIFO.
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PROBLEM 6-4A (Continued) (5) The illusionary gross profit is $27,000 ($351,000 – $324,000). Under LIFO, Stampfer Inc. has recovered the current replacement cost of the units ($406,000), whereas under FIFO, it has only recovered the earlier costs ($379,000). This means that under FIFO, the company must reinvest $27,000 of the gross profit to replace the units used. Answer in business-letter form:
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week 3 solutions - PROBLEM64A STAMPFER,INC....

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