2000

FIFO:
COGS

1,840 @ $20.00 = $36,800.00

600 @ 20.25 = 12,150.00
380 @ 21.00 = 7,980.00
2,820 @ $56,930.00
Inventory 420 @ 21.00 = 8,820.00
400 @ 21.25 = 8,500.00
200 @ 21.50 = 4,300.00
1,020 $21,620.00

LIFO:
COGS
200 @ $21.50 = $4,300.00
400 @ 21.25 = 8,500.00
800 @ 21.00 = 16,800.00
600 @ 20.25 = 12,150.00
820 @ 20.00 = 16,400.00
2,820 $58,150.00
Inventory 1,020 @ 20.00 = $20,400.00
AVERAGE COST: COGS 2,820 @ $20.456 = $57,685.92
Inventory 1,020 @ 20.456 = $20,865.92

2001
FIFO:
COGS
420 @ $ 21.00 = $ 8,820.00
400 @ 21.25 = 8,500.00
200 @ 21.50 = 4,300.00
700 @ 21.50 = 15,050.00
700 @ 21.50 = 15,050.00
660 @ 22.00 = 14,520.00
3,080 $66,240.00
Inventory 40 @ 22.00 = $ 880.00
1,000 @ 22.25 = 22,250.00
1,040 @ $23,130.00
LIFO:
COGS
1,000 @ $ 22.25 = $22,250.00
700 @ 22.00 = 15,400.00
700 @ 21.50 = 15,050.00
680 @ 21.50 = 14,620.00
3,080 $67,320.00
Inventory 20 @ $ 21.50 = $ 430.00
1,020 @ 20.00 = 20,400.00
1,040 @ 20.00 = $20,830.00
AVERAGE COST: COGS 3,080 @ $21.509 = $66,247.72
Inventory 1,040 @ 21.509 = $22,369.36
2002
FIFO:
COGS
40 @ $ 22.00 = $ 880.00
1,000 @ 22.25 = 22,250.00
1,000 @ 22.25 = 22,500.00
700 @ 22.75 = 15,925.00
210 @ 23.00 = 4,830.00
2,950 $66,385.00
Inventory 490 @ 23.00 = $11,270.00
700 @ 23.50 = 16,450.00
1,190 $27,720.00
LIFO:
COGS
700 @ $23.50 = $16,450.00
700 @ 23.00 = 16,100.00
700 @ 22.75 = 15,925.00
850 @ 22.50 = 19,125.00
2,950 $67,600.00
Inventory 1,020 @ 20.00 = $20,400.00
20 @ 21.50 = 430.00
150 @ 22.50 = 3,375.00
1,190 $24,205.00
AVERAGE COST: COGS 2,950 @ $22.547 = $66,513.65
Inventory 1,190 @ 22.547 = $26,830.93
Check on Calculations
FIFO LIFO AVG.COST
COGS 2000 $ 56,930 $ 58,150 $ 57,685.92
2001 66,240 67,320 66,247.72
2002 66,385 67,600 66,513.65
Inventory 2002 27,720 24,205 26,830.93
$217,275 $217,275 $217,278.22
Question 2
The calculation of the $1,406 tax difference for 2000-02 is shown below. However, this
difference is
really irrelevant for deciding what to do in future years.
FIFO LIFO
2000 Sales .................................................................. $95,880 $95,880
COGS ................................................................ 56,930 58,150
Gross Margin ..................................................... 38,950 37,730
Tax Expense ...................................................... 15,580 15,092
Net Income ........................................................ $23,370 $22,638
2001 Sales .................................................................. $110,110 $110,110
COGS ................................................................ 66,240 67,320
Gross Margin ..................................................... 43,870 42,790
Tax Expense ...................................................... 17,548 17,116
Net Income ........................................................ $ 26,322 $ 25,674
2002 Sales .................................................................. $105,462.50 $105,462.50
COGS ................................................................ 66,385.00 67,600.00
Gross Muffin ..................................................... 39,077.50 37,862.50
Tax Expense ...................................................... 15,631.00 15,145.00
Net Income ....................................................... $ 23,446.50 $ 22,717.50
Total Tax Expense Savings:
2000 $ 488
2001 432
2002 486
$1,406
An easier approach, which most students will overlook, is to note that the three-year
difference in COGS
is $3,515, and 40 percent of this is $1,406. Even easier, but much more subtle, is realizing that
the threeyear
COGS difference is equal to the difference in 2002 year-end inventories ($27,720 - $24,205 =
$3,515).
Question 3
Purchases for 2003 forecasted at 1,910* cartons @ 24.00
FIFO COGS 490 @ $23.00 = $11,270
700 @ 23.50 = 16,450
1,510 @ 24.00 = 36,240
2,700 $63,960
Inventory 400 @ $24.00 = $9,600
LIFO: COGS 1,910 @ $24.00 = $45,840
150 @ 22.50 = 3,375
20 @ 21.50 = 430
620 @ 20.00 = 12,400
2,700 $62,045
Inventory 400 @ 20.00 = $8,000
FIFO LIFO
2003 Sales (2,700 @ $35.75) ..................... $96,525 $96,525
COGS .................................................. 63,960 62,045
Gross margin ....................................... 32,565 34,480
Tax expense ........................................ 13,026 13,792
Net income .......................................... $19,539 $20,688
In 2003, LIFO would cause an increase in tax expense of $766.
*2,700 sales + 400 ending inventory - 1,190 beginning inventory = 1,910
Question 4
The LIFO reserve is the difference between inventory calculated under the FIFO method, and
inventory
calculated under the LIFO method.
LIFO Reserve = FIFO Inventory - LIFO Inventory
2000 $1,220 = $21,620 - $20,400
2001 $2,300 = $23,130 - $20,830
Another way to look at the LIFO reserve is that it represents the cumulative difference
between LIFO cost
of goods sold and FIFO cost of goods sold. We can see that in 2000, the LIFO reserve
($1,220) is equal to
the difference between LIFO cost of goods sold and FIFO cost of goods sold ($58,150 -
$56,930 =
$1,220). Similarly, in 2001, the LIFO reserve ($2,300) is equal to the sum of the differences
between
LIFO and FIFO cost of goods sold for 2000 and 2001, as shown below.
2000 2001
LIFO cost of goods sold .................... $58,150 $67,320
FIFO cost of goods sold .................... 56,930 66,240
Difference .......................................... $ 1,220 + $ 1,080 = $2,300
Therefore, if you are given LIFO cost of goods sold and inventory, and you are also given the
LIFO
reserve for that year (year X) and the previous year (year X-1), you can estimate the
following:
FIFO inventory (year X) = LIFO inventory (year X) + LIFO reserve (year X)
FIFO COGS (year X) = LIFO COGS (year X) - [LIFO reserve (year X) - LIFO reserve (year
X-l)]
Tax savings (year X) = [LIFO reserve (year X) - LIFO reserve (year X- 1)] *(1 – tax rate)
Cumulative tax savings due to the use of LIFO = LIFO reserve (year X)
Most companies on LIFO report the LIFO reserve in their financial statements, often in the
inventory
footnote. Understanding the significance of the LIFO reserve can be very useful when trying
to compare
the financial performance of companies using different inventory accounting methods.
Question 5

Days receiveable in 1998 improved from

49 days to 29 days
3. The budget indicate that Browning
Manufacturing Company fail to achieve its goal
of at least
$350,000 repayment for notes payable and
have a year-end cash balance of $150,000.
The budget shows that after repaying
$350,000, year-end cash balance will fall at
$145,840, short of $4,160.
To be able to achieve this goal, Browning
Manufacturing company must work more in
their collection,
convert at least 3%-5% ($6,000 - $10,068)of
accounts receivables to cash. Doing this, year-
end cash balance
will be at $151,480 - $155,548.
4. Inventory turnover ratio decrease
from 2.8 to 2.5 or 146 days
Align production based on the avergae
cost of good sales.
5. Accounts payable increased by 55%
which is negative impact to suppliers.
Increasing Brownings the hanging balance
in suppliers, less credit limit, which is
risky on the supplier part.