To manage its inventory more efficiently, Sunshine Corporation maintains its internal inventory records using first-in, first-out (FIFO)

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Question:

To manage its inventory more efficiently, Sunshine Corporation maintains its internal inventory records using first-in, first-out (FIFO) under a perpetual inventory system. Alias uses periodic last-in, first-out (LIFO) for external financial reporting purposes. The following information relates to its merchandise inventory during the year:

Jan. 1 Inventory on hand-20,000 units; cost $12.20 each.

Feb. 12 Purchased 70,000 units for $12.50 each.

Apr. 30 Sold 50,000 units for $20.00 each.

Jul. 22 Purchased 50,000 units for $12.80 each.

Sep. 9 Sold 70,000 units for $20.00 each.

Nov. 17 Purchased 40,000 units for $13.20 each.

Dec. 31 Inventory on hand-60,000 units.

1. Determine the amount Sunshine would calculate internally for ending inventory and cost of goods sold using perpetual FIFO.

2. Determine the amount Sunshine would report externally for ending inventory in the balance sheet and the cost of goods sold in the income statement using periodic LIFO.

3. Sunshine would provide a disclosure note to show its inventory methods and LIFO reserve at the end of the year. What is LIFO reserve? Record the year-end adjusting entry for the LIFO reserve, assuming the balance at the beginning of the year was $10,000.

4. Discuss the relative effect of FIFO and LIFO on the gross profit ratio when costs are rising and inventory quantity is not decreasing.