Chapter 8, Problem 2UJ

To determine

Introduction: Inventory includes raw materials, work-in-process goods and finished products which are held with the purpose of sale.

Given:

Accounting, Analysis, and Principles E Company sells two types of pumps. One is large and is for commercial use. The other is smaller and is used in residential swimming pools. The inventory data is available for the month of March and is provided in the question.

Accounting

(a)

The cost of inventory on hand on March 31 and the cost of goods sold for March under first-in first-out (FIFO), assuming that E uses a periodic inventory system.

To determine

(b)

The cost of inventory on hand on March 31 and the cost of goods sold for March. Assume E’s initial adoption of LIFO is on March 1 and E uses dollar-value LIFO and one pool, consisting of the combination of residential and commercial pumps. Use the double-extension method to determine the appropriate price indices. (Hint: The price index for February 28/March 1 should be 1.00.) (Round the index to three decimal places.)

To determine

Analysis

(c)

To explain: Assume you need to compute a current ratio for E. Which inventory method (FIFO or dollar-value LIFO) do you think would give you a more meaningful current ratio?

To determine

(d)

To explain: Some of E’s competitors use LIFO inventory costing and some use FIFO. How can an analyst compare the results of companies in an industry, when some use LIFO and others use FIFO?

To determine

Principles

To explain: Can companies change from one inventory accounting method to another? If a company changes to an inventory accounting method used by most of its competitors, what are the trade-offs in terms of the conceptual framework discussed in Chapter 2 of the textbook?