P9-7 Inventory alternatives

Solution is available here for U$7.50

Chapter 9 Inventories

P9-7 Inventory alternatives

Princess Retail Stores started doing business on January 1, 2005. The following data reflect its inventory purchases and sales during the year:

	Inventory Purchases
	Units	Cost per Unit	Total
January 1	20,000	$7.00	$140,000
March 1	16,000	9.00	144,000
June 1	14,000	11.00	154,000
September 1	10,000	13.00	130,000
December 1	12,000	15.00	180,000
	72,000		$748,000

P9-6 Criteria for choosing a cost flow assumption

Solution is available here for U$3.50

The president of Jeanette Corporation is in a dilemma regarding which inventory method (LIFO or FIFO) to use. The controller of Jeanette Corporation provides the following list of factor that should be considered before making a choice.

1.    Jeanette Corporation has borrowed money during the current month and has entered into a debt contract, the covenants of this contract require Jeanette Corporation to achieve a certain amount of net income and maintain a certain amount of working capital.

2.    The Board of Directors of Jeanette is contemplating a proposal to reward the top management of Jeanette Corporation with an incentive bonus that is based on accounting net income.

3.    The vice president of finance suggests using LIFO method for tax purposes and the FIFO method for financial reporting purposes. With the lower taxable income, Jeanette Corporation can save on the current tax it pays, and at the same time, it can show higher income in the financial reports and “look good.”

4.    The controller cautions that while the LIFO method may reduce the current period tax liability “it could hit us hard when things are not going so well.” This potential problem with the LIFO method could be “avoided if we use FIFO in the first place.”