Homework 6

# Homework 6 - The LIFO reserve is the amount that inventory...

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Jackie Gragnola BUS 214; MW 2-4 Bissonnette February 12, 2009 Chapter 6 12.) In times of inflation, LIFO gives way to lower inventory. Therefore, since Omega Company’s inventory is considerably below its current cost, it must be using the LIFO method of accounting. On the other hand, in times of inflation, FIFO creates higher inventory. In this case, Alpha Company must be using the FIFO method of accounting. Because Alpha Co. has a higher inventory, they must have a lower cost of goods sold which translates to a higher gross profit. So Alpha Company is probably reporting a higher gross profit. 14.) He is correct in that under FIFO, net income will rise, but this does not mean that the company would be better off. The net income will be made up of “phantom profit” so it will not realistically help the company. 17.) Under the lower of cost or market basis of accounting for inventories, any of the four methods of accounting will suffice. 21.)
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Unformatted text preview: The LIFO reserve is the amount that inventory would increase (or occasionally decrease) if the company had instead been using FIFO. Since analyzing the reserve allows analysts to make adjustments to compare companies that use different cost flow methods, ignoring this value would make it impossible to compare between companies using different methods. BE 6-4 a) FIFO b) FIFO c) LIFO d) Average cost BE 6-5 100 \$6 200 \$7 150 \$8 FIFO = [(100X6) + (200X7) + (150X8)] – [(150X8) + (140X7)] = \$1020 LIFO = [(100X6) + (200X7) + (150X8)] – [(100X6) + (190X7)] = \$1270 Phantom Profit = \$1270 – \$1020 = \$250 EX 6-7 (a) Units = 225+375+500 = 1100; C of GS = 1100–180 = 920; Total cost = 1125+2250+3500 = 6875 1) FIFO = 6875 – (180X7) = \$5615 2) LIFO = 6875 – (180X5) = \$5975 3) Average Cost: Weighted avg. unit cost = total cost/total units = 6875/1100 = \$6.25 Ei = 180X6.25 = \$1125 C of GS = total cost – Ei = 6875—1125 = \$5750...
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## This note was uploaded on 11/21/2011 for the course BUS 214 taught by Professor Waker during the Winter '08 term at Cal Poly.

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