The following table provides selected information for Carshack Autos: Sales: 37,500 COGS: 21,760 Beginning Inventory: 2,106 Beginning LIFO Reserve: 455 Ending LIFO Reserve: 591 The company reports 65% of its inventory on the basis of LIFO and the rest FIFO. What is the COGS based on LIFO? A. 21,833 B. 21,896 C. 21,969 D. 21,624
I would think 21624 COGS - Delta Lifo Reserve
Yup. “The company reports 65% of its inventory on the basis of LIFO and the rest FIFO” is a red herring.
The correct answer is A. Since 35% of inventory is based on FIFO, so is 35% of COGS is based on FIFO. We need to adjust the portion for LIFO effect. LIFO effect = 591 - 455 = 136. Total inventory on basis of FIFO = 2,106 + 455 = 2,561 at the beginning of the year. 65% of this corresponds to LIFO. Thus, the LIFO effect is the inflation rate on the LIFO component of FIFO. This component is = 0.65 x 2,561 = 1,665. Specific inflation rate = 136 / 1,665 = 0.0817, or 8.17%. Applying this rate to the FIFO component, we get LIFO adjustment for 35% FIFO = 0.35 x 2,561 x 0.0817 = 73 COGSLIFO = COGS65 LIFO / 35 FIFO + LIFOadjustment for 35% FIFO = 21,760 + 73 = 21,833.