Hello Carla,
Hope you are safe & doing well in CMA study
Two main points should be considered in solving this question:
- Prices are increasing
- Bell's management wants to lower the company's income taxes.
To lower income taxes, the management should decrease the operating income by
increasing the cost of goods sold (
COGS), taking in consideration that prices are increasing over time, the best inventory costing method to apply is
LIFO.
LIFO will consume the highest cost of goods first (160 units @ $1,076 .. backwards), leaving the lower cost at the last into inventory balance (50 units x $1,062) + (200 units x $1,055) = $264,100
Looking at the given options:
A: Is wrong, because COGS with FIFO will be lower than LIFO.
B: Is wrong, because Operating Income will be higher with LIFO than FIFO.
C & D:
Conceptually are correct, but the numbers are different.
By calculating COGS based on both methods, we will find that
option "C" is the correct answer. (I think you typed the wrong letter)
Please find the attached file for calculated COGS and Inventory as per the two methods (FIFO & LIFO), noting the revered impact on the balance sheet by decreased inventory value.
Wish you best of luck, success, safe & healthy condition
Kind regards
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Samer Ahmad, FMVA, SCA
Kuwait
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Original Message:
Sent: 06-17-2020 11:58 AM
From: Carla Loera
Subject: Exam 1 Additional Practice Question
Hi, I am currently studying to hopefully take Part 1 in September and need a bit of help with the following question, the answer is D but there is no explanation.
Bell Retail Company sells antique replica trunks to customers all over the world. Bell's
inventory records show the following.
Quantity (units) Cost (each)
Beginning inventory 200 $1,055
Purchases:
June 3 170 1,062
September 18 190 1,070
December 10 160 1,076
Bell sells 470 units this year. Management is researching whether the company should use last
in, first out (LIFO) or first in, first out (FIFO). If Bell's management wants to lower the
company's income taxes, which inventory cost flow assumption should Bell select?
a. FIFO, because the cost of goods sold will be $9,870 higher than LIFO.
b. FIFO, because the operating income will be $840 lower than LIFO.
c. LIFO, because the operating income will be $4,360 lower than FIFO.
d. LIFO, because the cost of goods sold will be $5,250 higher than FIFO.
TIA
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Carla Loera
Student
Laredo TX
United States
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