Form groups of three students each. (If there are more than three students in a group, extras can be paired up.) Each student should select or be assigned one of these three inventory methods:
1. Specific identification
2. FIFO
3. LIFO
Consider the following information from the annual report of Simpson Corporation. Simpson uses the LIFO method to account for its inventories ($ amounts are in millions).
For the year ended March 31, 20X1 (fiscal year 20X1)
Sales ................... $967
Cost of goods sold (using LIFO) ........ 534
Other operating expenses ........... 417
Operating income .............. $ 16
Purchases of inventory in fiscal 20X9 ...... $562
At March 31, 20X1
Inventories @ LIFO ............ $169
Inventories @ FIFO ............ 181
At March 31, 20X0
Inventories @ LIFO ............ $141
Inventories @ FIFO ............ 152
Assume that Simpson had exactly the same physical sales in the next fiscal year (20X2) as in fiscal 20X1, but sales prices rose slightly so that total fiscal 20X2 sales were $1,000. Assume that other operating expenses in fiscal 20X2 were exactly the same as in fiscal 20X1. Further assume Simpson bought just enough inventory in fiscal 20X2 to replace what the company sold, but because of a 5% price increase on April 1, purchases of inventories in fiscal 20X2 were $561.
(If there had been no price increase, the purchases of inventories would have equaled last year’s LIFO cost of goods sold, $534.) FIFO inventory on March 31, 20X2, was $190.
1. Compute operating income for Simpson for the year ended March 31, 20X2, using the inventory method to which you were assigned. Those using the LIFO and FIFO methods have all the information needed for the calculations. Those using specific identification must make some assumptions, and their operating income numbers will depend on the assumptions made.
2. Explain to the other members of the group how you computed the operating income, including an explanation of how you chose the assumptions you made.