(A) VALUATION OF INVENTORY, COGS AND PROFIR UNDER FIFO METHODAnswer to Question (1)Year Method Description INVENTORY Year Method Description INVENTORY

Qty Rate Amount ($) Qty Rate Amount ($)2009 FIFO 2010 FIFO COGS 420 21.00 8820

COGS COGS 1840 20.00 36800 400 21.25 8500

600 20.25 12150 200 21.50 4300

380 21.00 7980 700 21.50 15050

2820 56930 700 21.5 15050

660 22.00 14520

Sales 2820 34.00 95880 3080 66240

Closing Stock 420 21.00 8820 Inventory 40 22 880

400 21.25 8500 1000 22.25 22250

200 21.5 4300 1040 23130

Total C. Stock 1020 21620

LIFO COGS 1000 22.25 22250

LIFO COGS 200 21.50 4300 700 22 15400

400 21.25 8500 700 21.5 15050

800 21.00 16800 680 21.5 14620

600 20.25 12150 3080 67320

820 20.00 16400

58150 Inventory 20 21.5 430

1020 20 20400

Closing Stock 1020 20.00 20400 1040 20 20830

COGS 2820 20.456 57685.92 COGS 3080 21.509 66247.72

Closing Stock 1020 20.456 20865.12 Inventory 1040 21.509 22369.36

Average Cost

Average Cost

Check on Calculations

2009 56930 58150 57685.92

2010 66240 67320 66247.72

2011 66385 67600 66513.65

2011 27720 24205 26830.93

217275 217275 217278.22

Answer to Question (2)COMPARISION OF INVENTORY VALUE, COGS, PBT, TAX EXPENSES AND PAT UNDER THREE METHODS

Year Method of Valuation Sales COGSYear 2009

2009 FIFO 95880 56930PBT I Tax PAT Inventory LIFO Reserve Tax Saving

LIFO 95880 5815038950 15580 23370 21620

Average 95880 5768537730 15092 22638 20400 …..1220 488

Year 2010 38195 15278 22917 20865

2010 FIFO 110110 66240

LIFO 110110 6732043870 17548 26322 23130

Average 110110 6624542790 17116 25674 20830 2300 432

38195 15278 22917 22370Year 2011

2011 FIFO 105463 66385

LIFO 105463 6760039077 15631 23446 27720

COGS

Inventory

Average 105463 6652337862 15145 22717 24205 3515 486

38939 15576 23363 26822

Answer to Question (3) Inventory FIFORate

Opening 01.01.2012 1190 23.29Purchases 2012 1910 24 LIFO

Value Rate Value27720 20.34 2420545840 24 45840

3100Less: Closing Inventory 400 24

2700COGS 2700 35.75 73560 70045Sales 9600 20.34 8136

63960 61909PBT 96525 35.75 96525Income Tax

32565 34616PAT

13026 13846Extra Tax Liability

19539 20970820

The Tax Liability under LIFO method increases in year 2012 by $820. Thus LIFO method ofInventory valuation is recommended.

Answer to Question (4)

LIFO reserve is the difference in inventory valuation between LIFO method and FIFO method. During inflationwhen price of product continue to rise then closing inventory under LIFO menthod is valued based on earlierpurchase and COOGS is charged under recent purchase value. Thus PBT gets reduced and also the tax liability.

We create LIFO reserve to nullify the impact of difference in inventory valuation arising due to LIFO method.

Answer to Question 5:

Tax authority does not recognize LIFO method of valuation of inventories. Moreover Inventory is valued based on recentpurchase price. US GAAP also requires a company to follow consistent accounting policy and for any change in methodproper disclosure is required. During inflation due to persistent high demand hardly few stocks are left out and valuingsuch stock at old purchase price appears to be a misnomar. Moreover LIFO reserve does indicate impact on profit due to adoption of LIFO method for inventory valuation.

(A) VALUATION OF INVENTORY, COGS AND PROFIR UNDER FIFO METHOD

Year MethodDescription INVENTORY

2011 FIFO Qty Rate Amount ($)

COGS 40 22 880

1000 22.25 22250

1000 22.5 22500

700 22.75 15925

210 23 4830

2950 66385

Inventory

490 23 11270

700 23.5 16450

1190 27720LIFO

COGS 700 23.5 16450

700 23 16100

700 22.75 15925

850 22.5 19125

2950 67600

1020 20 20400

Inventory 20 21.5 430

150 22.5 3375

1190 24205COGS 2950 22.547 66513.65

Inventory 1190 22.547 26830.93

Average Cost

Tax Saving