Case 6.

2: Lewis Corporation

Question-1

FIFO

2009
COGS 1840 @ $20.00 = $36800
600 @ 20.25 = 12150
380 @ 21.00 = 7980
Total 2820 @ $56930

Inventory 420 @ 21.00 = 8820

400 @ 21.25 = 8500
200 @ 21.50 = 4300
Total 1020 @ 21620

LIFO

COGS 200 @ 21.50 = $4300

400 @ 21.25 = 8500
800 @ 21.0 = 16800
600 @ 20.25 = 12150
820 @ 20.00 16400
Total 2820 58150

Inventory 1020 @ 20.00 = 20400

Average Cost
COGS 2820 @ 20.456 = 57685.92
Inventory 1020 @ 20.456 = 20.965.12

Note- In all the three Cases the sum of the cost of Goods sold and ending Inventory amounts in the
same: $78550 ( slightly different with average cost because of rounding errors) which is the sum of the
beginning inventory and purchsses ( i.e available for sale).

FIFO

2010
COGS 420 @ 21.00 = 8820
400 @ 21.25 = 8500
200 @ 21.50 = 4300
700 @ 21.50 = 15050
700 @ 21.50 = 15050
660 @ 22.00 = 14520
Total 3080 @ 66240
Inventory 40 @ 22.00 = 880
1000 @ 22.25 = 22250
Total 1040 @ = 23130

LIFO

COGS 1000 @ 22.25 = 22250

700 @ 22.00 = 15400
700 @ 21.50 = 15040
680 @ 21.50 = 14620
Total @ 67320
Inventory 20 @ 21.50 = 430
1020 @ 20.00 = 20400
1040 @ 20.00 = 20830
Average Cost
COGS 3080 @ 21.509 = 66247.72
Inventory 1040 @ 21.509 = 22369.36

FIFO

2011
COGS 40 @ 22.00 = 880
1000 @ 22.25 = 22250
1000 @ 22.50 = 22500
700 @ 22.75 = 15925
210 @ 23.00 = 4830
Total 2950 = 66385

Inventory 490 @ 23.00 = 11270

700 @ 23.50 = 16450
Total 1190 27720

LIFO

COGS 700 @ 23.50 = 16450

700 @ 23.00 = 16100
700 @ 22.75 = 15925
850 @ 22.50 = 19125
Total 2950 @ 67600
1020 @ 20.00 = 20400

Inventory 20 @ 21.50 = 430

 150 @ 22.50 = 3375
Total 1190 24205
Average Cost
COGS 2950 @ 22.547 = 66513.65
Inventory 1190 @ 22.547 = 26830.93

Check on Calculations:-

FIFO LIFO Avg Cost

COGS 2009 56930 58150 57685.92
2010 66240 67320 66247.72
2011 66385 67600 66513.65
Inventory 2011 27720 24205 26830.93
217275 217275 217278.22

Question 2

The Calculation of the $1406 tax difference for 2009-2011 is shown below. However, this difference is
really irrelevant for deciding what to do in future years.

FIFO LIFO
2009 Sales 95880 95880
COGS 56930 58150
Gross Margin 38950 37730
Tax expense 15580 15092
Net Income 23370 22638

FIFO LIFO
2010 Sales 110110 110110
COGS 66240 67320
Gross Margin 43870 42790
Tax expense 17548 17116
Net Income 26322 25674

FIFO LIFO
2011 Sales 105462.50 105462.50
COGS 66385.0 67600
Gross Muffin 39077.50 37862.50
Tax expense 15631.0 15145.0
Net Income 23446.50 22717.50

Total Tax Expense Savings:-

2009 488
2010 432
2011 486
Total 1406

It may be noted that the three year difference in COGS is $3515 and 40 % of this is $1406. The three
ear COGS difference is equal to the difference in 2007 year end inventories ( $27720-$24205=3515).

Question 3

Purchases for 2012 forecasted at 1910 cartons @24.00

FIFO

COGS 490 @ 23.00 = 11270

700 @ 23.50 = 16450
1510 @ 24.00 = 36240
Total 2700 @ = 63960

Inventory 400 @ 24.00 = 9600

LIFO

COGS 1910 @ 24.00 = 45840

150 @ 22.50 = 3375
20 @ 21.50 = 430
620 @ 20.00 = 12400
Total 2700 62045

Inventory 400 @ 20 = 8000

FIFO LIFO
2012 Sales (2700@$35.75) $96525 96525
COGS 63960 62045
Gross Margin 32565 34480
Tax expense 13026 13792
Net Income $19539 $20688

In 2012, LIFO would cause an increase in Tax expense of $766.

Question 4

The LIFO reserve is the difference between inventory calculated under the FIFO method, and
inventory calculated under the LIFO method.
 LIFI reserve = FIFO Inventory - LIFO Inventory
2009 $1220 = 21620 - 20400
2010 2300 = 23130 - 20830

LIFO reserve also represents the cumulative difference between LIFO Cost of goods sold and FIFO Cost
of gods sold. We can see that in 2009, the LIFO reserve ($1220) is equal to the difference between
LIFO Cost of goods sold and FIFO cost of goods sold (58150-56930=1220). Similarly, in 2010, the LIFO
reserve ($2300) is equal to sum of the differences between LIFO and FIFO cost of goods sold for 2009
and 2010, as shown.

2009 2010
LIFO cost of goods sold 58150 67320
FIFO cost of goods sold 56930 66240
Difference 1220 + 1080=$2300

We can estimate the following:-

FIFO inventory ( year X)= LIFO inventory ( yearX)+ LIFO reserve ( year X)

FIFO COGS ( year X)= LIFO COGS ( Year X)- [ LIFO reserve ( year X)-LIFO reserve (year X-1)]

Tax Savings ( year X)= [ LIFO reserve (year X)- LIFO reserve (year X-1)* (1- Tax rate)

Cumulative Tax savings due to the use of LIFO = LIFO ( year X)