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# FINANCIAL ACCOUNTING

CASE 6-2
Lewis Corporation
Case Analysis

Group

Members :

2
Carbonell, Rosario
Carpio, Nathaniel
Zarate, Vic Paulo

Date

I.

II.

## BACKGROUND OF THE CASE

Lewis Corporation had traditionally used the FIFO method of inventory valuation. You are
given the information shown in Exhibit 1 on transactions during the year affecting Lewiss
inventory account. (The purchases are in sequence during the year. The company uses a
periodic inventory method).
Exhibit 1

2009
Beginning balance purchases

Sales
2010
Beginning balance purchases

Sales
2011
Beginning balance purchases

Sales
III.

1840
600
800
400
200
2820

cartons
cartons
cartons
cartons
cartons
cartons

\$20.00
\$20.25
\$21.00
\$21.25
\$21.50
\$34.00

1020
700
700
700
1000
3080

cartons
cartons
cartons
cartons
cartons
cartons

\$21.50
\$21.50
\$22.00
\$22.25
\$35.75

1040
1000
700
700
700
2950

cartons
cartons
cartons
cartons
cartons
cartons

\$22.50
\$22.75
\$23.00
\$23.50
\$35.75

## STATEMENT OF THE PROBLEM

1). Calculate the cost of goods sold and year-end inventory amounts for 2009, 2010, and
2011 using the (a) FIFO, (b) LIFO, and (c) average cost methods.
2). Lewis Corporation is considering switching from FIFO to LIFO to reduce its income
tax expense. Assuming a corporate income tax rate of 40 percent, calculate the tax
savings this would have made for 2009 to 2011. Would you recommend that Lewis make
the change?

3). Dollar sales for 2012 are expected to drop by approximately 8 percent, as a recession
in Lewiss market is forecasted to continue at least through the first three quarters of the
year. Total sales are forecasted to be 2,700 cartons. Lewis will be unable to raise its
selling price from the 2011 level of \$35.75. However, costs are expected to increase to
\$24.00 per carton for the whole year. Due to these cost/price pressures, the corporation
wishes to lower its investment in inventory by holding only the essential inventory of 400
cartons at any time during the year. What is the effect of remaining on FIFO, assuming
Lewis had adopted FIFO in 2009? What is the effect of remaining on LIFO, assuming Lewis
4).What is the LIFO reserve in 2009? What is the LIFO reserve in 2010? What is the
significance of the LIFO reserve number? How much did the LIFO reserve increase in
2010? What is the significance of this increase?
5). Despite continuing inflation in the United States in the 1980s and the early 1990s
many companies continued to use FIFO for all or part of their domestic inventories. Why
do you believe this was the case?

IV.
1.

ANALYSIS
A.) FIFO METHOD

Total
Sales

Total
Sales

Total
Sales

2009
Unit
1840
600
800
400
200
3840
2820
2010
Unit
1020
700
700
700
1000
4120
3080
2011
Unit
1040
1000
700
700
700
4140
2950

cartons
cartons
cartons
cartons
cartons
cartons
cartons

Unit Cost
\$20.00
\$20.25
\$21.00
\$21.25
\$21.50

1840
600
380

Total Cost
\$36,800.00
\$12,150.00
\$7,980.00

2820

\$56,930.00

Unit
1020
700
700
660

Total Cost
\$21,620.00
\$15,050.00
\$15,050.00
\$14,520.00

3080

\$66,240.00

Unit
1040
1000
700
210

Total Cost
\$23,130.00
\$22,500.00
\$15,925.00
\$4,830.00

2950

\$66,385.00

Unit
0
0
420
400
200
1020

Total Cost
\$0.00
\$0.00
\$8,820.00
\$8,500.00
\$4,300.00
\$21,620.00

\$34.00
Unit Cost

cartons
cartons
cartons
cartons
cartons

Unit

Ending Inventory

\$21.50
\$21.50
\$22.00
\$22.25

cartons

\$35.75

cartons
cartons
cartons
cartons
cartons

Unit Cost
\$22.24
\$22.50
\$22.75
\$23.00
\$23.50

cartons

\$35.75

Ending Inventory
Unit
0
0
0
40
1000
1040
Ending Inventory
Unit
0
0
0
490
700
1190

Total Cost
\$0.00
\$0.00
\$0.00
\$880.00
\$22,250.00
\$23,130.00

Total Cost
\$0.00
\$0.00
\$0.00
\$11,270.00
\$16,450.00
\$27,720.00

## B.) LIFO METHOD

Cost of Goods Sold

Ending Inventory

2009

Total

Unit
1840
600
800
400
200
3840

cartons
cartons
cartons
cartons
cartons
cartons

Sales

2820

cartons

Unit Cost
\$20.00
\$20.25
\$21.00
\$21.25
\$21.50

## Cost of Goods Sold

cartons
cartons
cartons
cartons
cartons

Unit Cost
\$20.00
\$21.50
\$21.50
\$22.00
\$22.25

Total

Unit
1020
700
700
700
1000
4120

Sales

3080

cartons

\$35.75

2011
Beginning balance purchases

Total
Sales

820
600
800
400
200
2820

Total Cost
\$16,400.00
\$12,150.00
\$16,800.00
\$8,500.00
\$4,300.00
\$58,150.00

1020
0
0
0
0
1020

Total Cost
\$20,400.00
\$0.00
\$0.00
\$0.00
\$0.00
\$20,400.00

Unit
0
680
700
700
1000
3080

Ending Inventory
Total Cost
\$0.00
\$14,620.00
\$15,050.00
\$15,400.00
\$22,250.00
\$67,320.00

## Cost of Goods Sold

Unit
1040
1000
700
700
700
4140
2950

Unit

\$34.00

2010
Beginning balance purchases

Unit

cartons
cartons
cartons
cartons
cartons

Unit Cost
\$20.03
\$22.50
\$22.75
\$23.00
\$23.50

cartons

\$35.75

Unit
0
850
700
700
700
2950

Unit
1020
20
0
0
0
1040

Total Cost
\$20,400.00
\$430.00
\$0.00
\$0.00
\$0.00
\$20,830.00

Ending Inventory
Total Cost
\$0.00
\$19,125.00
\$15,925.00
\$16,100.00
\$16,450.00
\$67,600.00

Unit
1040
150
0
0
0
1190

Total Cost
\$20,830.00
\$3,375.00
\$0.00
\$0.00
\$0.00
\$24,205.00

## C.) AVERAGE COST METHOD

Unit
cost

Units
Beginning balance purchases

## Goods Available for sale

Sales
Ending Inventory
Cost of goods sold
Beginning balance purchases

## Goods Available for sale

Sales
Ending Inventory
Cost of goods sold
Beginning balance purchases

## Goods Available for sale

Sales
Ending Inventory
Cost of goods sold

Cost Total

2009
1840
600
800
400
200
3840
2820
1020
2820

cartons
cartons
cartons
cartons
cartons
cartons
cartons
cartons
cartons

\$20.00
\$20.25
\$21.00
\$21.25
\$21.50
\$20.46
\$34.00
\$20.46
\$20.46

2010
1020
700
700
700
1000
4120
3080
1040
3080

cartons
cartons
cartons
cartons
cartons
cartons
cartons
cartons
cartons

\$20.46 \$20,864.84
\$21.50 \$15,050.00
\$21.50 \$15,050.00
\$22.00 \$15,400.00
\$22.25 \$22,250.00
\$21.51 \$88,614.84
\$35.75 \$110,110.00
\$21.51 \$22,368.80
\$21.51 \$66,246.05

2011
1040
1000
700
700
700
4140
2950
1190
2950

cartons
cartons
cartons
cartons
cartons
cartons
cartons
cartons
cartons

\$21.51 \$22,368.80
\$22.50 \$22,500.00
\$22.75 \$15,925.00
\$23.00 \$16,100.00
\$23.50 \$16,450.00
\$22.55 \$93,343.80
\$35.75 \$105,462.50
\$22.55 \$26,830.70
\$22.55 \$66,513.09

\$36,800.00
\$12,150.00
\$16,800.00
\$8,500.00
\$4,300.00
\$78,550.00
\$95,880.00
\$20,864.84
\$57,685.16

2.

Sales
Cost of goods sales
Gross Margin
Tax (40%)
Net Income
Savings in TAX
Net Income difference

2009
2010
2011
FIFO
LIFO
FIFO
LIFO
FIFO
LIFO
95880
95880 110110 110110 105462.5 105462.5
56930
58150
66240
67320
66385
67600
38950
37730
43870
42790 39077.5 37862.5
15580
15092
17548
17116
15631
15145
23370
22638
26322
25674 23446.5 22717.5
488
432
486
732
648
729

We would not recommend Lewis Corporation to switch from FIFO to LIFO even if it has a TAX savings.
Only because, the TAX savings we got from changing from FIFO to LIFO would not compensate the
Net income difference from the two methods. FIFO has more income than LIFO.

3.

FIFO Forecast

Cost of Goods
Sold

2012

Beginning balance
Purchases
Total
Sales

Unit
1190

Unit Cost
\$23.29

1910
3100
2700

\$24.00

Unit

Ending
Inventory

Total Cost
1190 \$27,720.00
1510 \$36,240.00

Unit
0

Total
Cost
\$0.00

400 \$9,600.00

2700 \$63,960.00

LIFO Forecast

Cost of Goods
Sold

2012

Beginning balance
Purchases
Total
Sales

Unit
1190
1910
3100
2700

Sales
Cost of goods sales
Gross Margin
Tax (40%)
Net Income

Unit Cost
\$20.34
\$24.00

Unit

Ending
Inventory

Total Cost
790 \$16,068.87
1910 \$45,840.00
2700 \$61,908.87

2009
2010
2011
FIFO
LIFO
FIFO
LIFO
FIFO
LIFO
95880
95880 110110 110110 105462.5 105462.5
56930
58150
66240
67320
66385
67600
38950
37730
43870
42790 39077.5 37862.5
15580
15092
17548
17116
15631
15145
23370
22638
26322
25674 23446.5 22717.5

Unit
400
0

Total
Cost
\$8,136.13
\$0.00

400 \$8,136.13

2012 - Forecast
FIFO
LIFO
96525
96525
63960 61908.87
32565 34616.13
13026 13846.45
19539 20769.68

Since the total sales forecasted for year 2012 is a period of deflation, with FIFO it has lower taxable
income and will pay lower taxes than LIFO. For LIFO has higher taxable income and will pay more
taxes than FIFO. Therefore, well still recommend FIFO method.

4.

LIFO
Rsrv
FIFO
LIFO
LIFO Rsrv
FIFO
LIFO
LIFO Rsrv
Increase
21620 20400
1220 23130 20830
2300
1080
2009

2010

The significance of the LIFO reserve number was the amount inventory difference as the period goes
on. This value must be in the notes to the financial statement to permit the reader to convert the
inventory to a FIFO basis. The 1080 increase on 2010 is the amount needed to add to the LIFO
inventory amount to convert it to FIFO.

5.

V.

VI.

RECOMMENDATION

VII.

CONCLUSION