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Cornerstones of Financial Accounti...

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Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
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Effects of Inventory Costing Methods

Jefferson Enterprises has the following income statement data available for 2019:

Chapter 6, Problem 53E, Effects of Inventory Costing Methods Jefferson Enterprises has the following income statement data , example  1

Jefferson uses a perpetual inventory accounting system and the average cost method. Jefferson is considering adopting the FIFO or LIFO method for costing inventory. Jefferson’s accountant prepared the following data:

Chapter 6, Problem 53E, Effects of Inventory Costing Methods Jefferson Enterprises has the following income statement data , example  2

Required:

1. Compute income before taxes, income taxes expense, and net income for each of the three inventory costing methods. (Round to the nearest dollar.)

2. CONCEPTUAL CONNECTION Why are the cost of goods sold and ending inventory amounts different for each of the three methods? What do these amounts tell us about the purchase price of inventory during the year?

3. CONCEPTUAL CONNECTION Which method produces the most realistic amount for net income? For inventory? Explain your answer.

To determine

(a)

Inventory costing methods:

FIFO, LIFO and average cost method, are those method which used for calculation of closing inventory and cost of goods sold.

The income before taxes, income tax expenses and net income as per three inventory costing methods.

Explanation

The computation of income before taxes, income tax expenses and net income as per three inventory costing methods are:

FIFO ($) LIFO ($) Average Cost ($)
Sales 828600.00 828600.00 828600.00
Less: COGS 386500.00 424900.00 399050.00
Gross Profit 442100 403700.00 429550.00
Less: Operating Expenses 370400.00 370400
To determine

(b)

Inventory costing methods:

FIFO, LIFO and average cost method, are those method which used for calculation of closing inventory and cost of goods sold.

To calculate:

The difference between each of three methods in regard to closing inventory and cost of goods sold.

To determine

(c)

Inventory costing methods:

FIFO, LIFO and average cost method, are those method which used for calculation of closing inventory and cost of goods sold.

To calculate:

The method which produces the most realistic amount for net income.

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