TUTORIAL TEST 8

The management of MWG Co. is reevaluating the appropriateness of using its present inventory
cost flow method, which is average-cost. They request your help in determining the results of
operations for 2021 if either the FIFO method or the LIFO method had been used. For 2021, the
accounting records show the following data.

Inventories Purchaes and Sales

Beginning (15,000 units) $32,000 Total net sales (217,000 units) $865,000

Ending (28,000 units) Total cost of goods purchased 600,000

(230,000 units)

Purchases were made quarterly as follows.

Quater Units Unit Cost Total Costs

1 60,000 $2.40 $144,000

2 50,000 2.50 125,000

3 50,000 2.70 135,000

4 70,000 2.80 196,000

230,000 $600,000
Sales were made quarterly after each purchase as follows:

Quarter Sold (Units)

1 55,000
2 50,000
3 50,000
4 62,000
217,000
Operating expenses were $147,000, and the company’s income tax rate is 34%.

Instructions
I. Perpetual inventory system
(a) Prepare comparative condensed income statements for 2021 under FIFO and LIFO. (Show
computations of COGS.)
II. Periodic inventory system
(b) Prepare comparative condensed income statements for 2021 under FIFO and LIFO. (Show
computations of ending inventory and COGS.)
(c) Answer the following questions for management.
(1) Which cost flow method (FIFO or LIFO) produces the more meaningful inventory
amount for the balance sheet? Why?
(2) Which cost flow method (FIFO or LIFO) produces the more meaningful net income?
Why?
(3) Which cost flow method (FIFO or LIFO) is more likely to approximate actual
physical flow of the goods? Why?
(4) How much additional cash will be available for management under LIFO than
under FIFO? Why?
(5) Will gross profit under the average-cost method be higher or lower than
(i) FIFO and
(ii) LIFO?
(Note: It is not necessary to quantify your answer.)