Question

Sletten Industries uses the last-in, First-out(LIFO) method of accounting for the inventories of its single product....

Sletten Industries uses the last-in, First-out(LIFO) method of accounting for the inventories of its single product. For fiscal year 2020, the company reported sales revenue of $200 million and cost of goods sold of $135 million. The following table was reported in the financial statement footnotes,

($ millions) Jan 1, 2020 Dec 31, 2020

Inventory value at LIFO $25 $28

LIFO Reserve 14 22

Inventory value at FIFO 39 50

If Sletten Industries had used FIFO to account for its inventory, its 2020 gross profit would be

a. $87 million

b. $73 million

c. $57 million

d $65 million

Business   Accounting   
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Answer #1

Cost of goods sold (LIFO) = $135 million

Sales = $200 million

LIFO reserve, beginning = $14 million

LIFO reserve, ending = $22 million

Increase in LIFO reserve = LIFO reserve, ending- LIFO reserve, beginning

= 22-14

= $8 million

Cost of goods sold (FIFO) = Cost of goods sold (LIFO)- Increase in LIFO reserve

= 135-8

= $127 million

Gross profit under FIFO = Sales- Cost of goods sold (FIFO)

= 200-127

= $73 million

If Sletten Industries had used FIFO to account for its inventory, its 2020 gross profit would be $73 million

Correct option is b.

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