# Chapter 6-2 Group Report

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## Case Analysis

### Zarate, Vic Paulo

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I. TITLE OF THE CASE: Lewis Corporation II. BACKGROUND OF THE CASE

Lewis Corporation had traditionally used the FIFO method of inventory valuation. You are given the information shown in Exhibit 1 on transactions during the year affecting Lewis’s inventory account. (The purchases are in sequence during the year. The company uses a periodic inventory method).

Exhibit 1

### 2950 cartons \$35.75

III. STATEMENT OF THE PROBLEM

1). Calculate the cost of goods sold and year-end inventory amounts for 2009, 2010, and 2011 using the (a) FIFO, (b) LIFO, and (c) average cost methods.

2). Lewis Corporation is considering switching from FIFO to LIFO to reduce its income tax expense. Assuming a corporate income tax rate of 40 percent, calculate the tax savings this would have made for 2009 to 2011. Would you recommend that Lewis make the change?

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3). Dollar sales for 2012 are expected to drop by approximately 8 percent, as a recession in Lewis’s market is forecasted to continue at least through the first three quarters of the year. Total sales are forecasted to be 2,700 cartons. Lewis will be unable to raise its selling price from the 2011 level of \$35.75. However, costs are expected to increase to \$24.00 per carton for the whole year. Due to these cost/price pressures, the corporation wishes to lower its investment in inventory by holding only the essential inventory of 400 cartons at any time during the year. What is the effect of remaining on FIFO, assuming Lewis had adopted FIFO in 2009? What is the effect of remaining on LIFO, assuming Lewis had adopted LIFO in 2009? What method would you recommend now?

4).What is the LIFO reserve in 2009? What is the LIFO reserve in 2010? What is the significance of the LIFO reserve number? How much did the LIFO reserve increase in 2010? What is the significance of this increase?

5). Despite continuing inflation in the United States in the 1980s and the early 1990s many companies continued to use FIFO for all or part of their domestic inventories. Why do you believe this was the case?

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IV. ANALYSIS 1. A.) FIFO METHOD

Cost of Goods Sold Ending Inventory

2009

Unit Unit Cost Unit Total Cost Unit Total Cost

Beginning balance purchases 1840 cartons \$20.00 1840 \$36,800.00 0 \$0.00

600 cartons \$20.25 600 \$12,150.00 0 \$0.00 800 cartons \$21.00 380 \$7,980.00 420 \$8,820.00 400 cartons \$21.25 400 \$8,500.00 200 cartons \$21.50 200 \$4,300.00 Total 3840 cartons 2820 \$56,930.00 1020 \$21,620.00 Sales 2820 cartons \$34.00

2010 Cost of Goods Sold Ending Inventory

Unit Unit Cost Unit Total Cost Unit Total Cost

Beginning balance purchases 1020 cartons 1020 \$21,620.00 0 \$0.00

700 cartons \$21.50 700 \$15,050.00 0 \$0.00 700 cartons \$21.50 700 \$15,050.00 0 \$0.00 700 cartons \$22.00 660 \$14,520.00 40 \$880.00 1000 cartons \$22.25 1000 \$22,250.00 Total 4120 3080 \$66,240.00 1040 \$23,130.00 Sales 3080 cartons \$35.75

2011 Cost of Goods Sold Ending Inventory

Unit Unit Cost Unit Total Cost Unit Total Cost

Beginning balance purchases 1040 cartons \$22.24 1040 \$23,130.00 0 \$0.00

1000 cartons \$22.50 1000 \$22,500.00 0 \$0.00 700 cartons \$22.75 700 \$15,925.00 0 \$0.00 700 cartons \$23.00 210 \$4,830.00 490 \$11,270.00 700 cartons \$23.50 700 \$16,450.00 Total 4140 2950 \$66,385.00 1190 \$27,720.00 Sales 2950 cartons \$35.75

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B.) LIFO METHOD

Cost of Goods Sold Ending Inventory

2009

Unit Unit Cost Unit Total Cost Unit Total Cost

Beginning balance purchases 1840 cartons \$20.00 820 \$16,400.00 1020 \$20,400.00

600 cartons \$20.25 600 \$12,150.00 0 \$0.00 800 cartons \$21.00 800 \$16,800.00 0 \$0.00 400 cartons \$21.25 400 \$8,500.00 0 \$0.00 200 cartons \$21.50 200 \$4,300.00 0 \$0.00 Total 3840 cartons 2820 \$58,150.00 1020 \$20,400.00 Sales 2820 cartons \$34.00

2010 Cost of Goods Sold Ending Inventory

Unit Unit Cost Unit Total Cost Unit Total Cost

Beginning balance purchases 1020 cartons \$20.00 0 \$0.00 1020 \$20,400.00

700 cartons \$21.50 680 \$14,620.00 20 \$430.00 700 cartons \$21.50 700 \$15,050.00 0 \$0.00 700 cartons \$22.00 700 \$15,400.00 0 \$0.00 1000 cartons \$22.25 1000 \$22,250.00 0 \$0.00 Total 4120 3080 \$67,320.00 1040 \$20,830.00 Sales 3080 cartons \$35.75

2011 Cost of Goods Sold Ending Inventory

Unit Unit Cost Unit Total Cost Unit Total Cost

Beginning balance purchases 1040 cartons \$20.03 0 \$0.00 1040 \$20,830.00

1000 cartons \$22.50 850 \$19,125.00 150 \$3,375.00 700 cartons \$22.75 700 \$15,925.00 0 \$0.00 700 cartons \$23.00 700 \$16,100.00 0 \$0.00 700 cartons \$23.50 700 \$16,450.00 0 \$0.00 Total 4140 2950 \$67,600.00 1190 \$24,205.00 Sales 2950 cartons \$35.75

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C.) AVERAGE COST METHOD

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2.

### 729

We would not recommend Lewis Corporation to switch from FIFO to LIFO even if it has a TAX savings. Only because, the TAX savings we got from changing from FIFO to LIFO would not compensate the Net income difference from the two methods. FIFO has more income than LIFO.

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3. FIFO Forecast

LIFO Forecast

### 13846.45

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Since the total sales forecasted for year 2012 is a period of deflation, with FIFO it has lower taxable income and will pay lower taxes than LIFO. For LIFO has higher taxable income and will pay more taxes than FIFO. Therefore, we’ll still recommend FIFO method.

4.

### 1080

The significance of the LIFO reserve number was the amount inventory difference as the period goes on. This value must be in the notes to the financial statement to permit the reader to convert the inventory to a FIFO basis. The 1080 increase on 2010 is the amount needed to add to the LIFO inventory amount to convert it to FIFO.

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V. ALTERNATIVE COURSES OF ACTION

VI. RECOMMENDATION

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## References

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