The management of Maltwo Co. asks your help in determining the comparative effects of the FIFO and LIFO inventory cost flow methods. For 2015, the accounting records show the following data. Inventory, January 1 (10,000 units) $ 37,000 Cost of 110,000 units purchased 479,000 Selling price of 90,000 units sold 720,000 Operating expenses 150,000 Units purchased consisted of 40,000 units at $4.20 on May 10; 50,000 units at $4.40 on August 15; and 20,000 units at $4.55 on November 20. Income taxes are 30%. Instructions: Prepare comparative condensed income statements for 2015 under FIFO and LIFO. (Show computations of ending inventory.) Answer the following questions for management. Which inventory cost flow method produces the most meaningful inventory amount for the balance sheet? Why? Which inventory cost flow method produces the most meaningful net income? Why? How muc

Net income for Maltwo Co. is $132,300

Explanation:

FIFO

Sold 90,000 units

Cost of sold units =  

opening 10,000 units for $3.7 = $37,000

purchased 40,000 units for $4.20 = $168,000

purchased 40,000 units for $4.4 = $176,000

Total cost of goods sold = $381,000

Sales = $720,000

less: cost of goods sold = $381,000

less: operating expenses = $150,000

Operating income = $189,000

less: Income tax 30% = $56,700

Net Income = $132,300

LIFO

Sold 90,000 units

Cost of sold units =  

purchased 20,000 units for $4.55 = $91,000

purchased 50,000 units for $4.40 = $220,000

purchased 20,000 units for $4.20 = $84,000

Total cost of goods sold = $395,000

Sales = $720,000

less: cost of goods sold = $395,000

less: operating expenses = $150,000

Operating income = $175,000

less: Income tax 30% = $52,500

Net Income = $122,500

Most meaningful net income is calculated by FIFO because in most of the businesses goods purchased first are sold first and if not then the goods purchased the earliest cross its expiry date and eventually results in a loss for the company.

So the net income for Maltwo Co. is $132,300

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