compare the two income statements and discuss why it might have been wise for ibt to 615130
Avoiding LIFO liquidations
IBT has used the LIFO inventory cost flow assumption for five years. As of December 31, 2010, IBT had 700 items in its inventory, and the $9,000 inventory dollar amount reported on the balance sheet consisted of the following costs:
|
When Purchased |
Number of Items |
Cost per Item |
Total |
|
2007 |
500 |
$12 |
$6,000 |
|
2009 |
200 |
15 |
3,000 |
|
Total |
700 |
$9,000 |
During 2011, IBT sold 900 items for $75 each and purchased 350 items at $30 each. Expenses other than cost of goods sold totaled $20,000, and the federal income tax rate is 30 percent of taxable income.
REQUIRED:
a. Prepare IBT”s income statement for the year ending December 31, 2011.
b. Assume that IBT purchased an additional 550 items on December 20, 2011, for $30 each. Prepare IBT”s income statement for the year ending December 31, 2011.
c. Compare the two income statements, and discuss why it might have been wise for IBT to purchase the additional items on December 20. Discuss some of the disadvantages of such a strategy.