Lambert Corporation |
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Beginner |
2 |
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Lambert Corporation had traditionally used the FIFO method of inventory valuation. You are given the information shown in Exhibit 1 on transactions during the year affecting Lambert’s inventory account. (The purchases are in sequence during the year.)
Assignment
- Calculate the cost of goods sold and year-end inventory amounts for 2002, 2003, and 2004 using the (a) FIFO, (b) LIFO, and (c) average cost methods.
- Lambert Corporation is considering switching from FIFO to LIFO to reduce its income tax expense. Assuming a corporate income tax rate of 40 percent, calculate the tax savings this would have made for 2002 to 2004. Would you recommend that Lambert make this change?
- Dollar sales for 2005 are expected to drop by approximately 8 percent, as a recession in Lambert’s market is forecasted to continue at least through the first three quarters of the year. Total sales are forecasted to be 2,700 cartons. Lambert will be unable to raise its selling price from the 2004 level of $35.75. However, costs are expected to increase to $24 per carton for the whole year. Due to these cost/price pressures, the corporation wishes to lower its investment in inventory by holding only the essential inventory of 400 cartons at any time during the year. What is the effect of remaining on FIFO, assuming Lambert had adopted FIFO in 2002? What is the effect of remaining on LIFO, assuming Lambert adopted LIFO in 2002? What method would you recommend now?
- What is the LIFO Reserve in 2002? What is the LIFO Reserve in 2003? What is the significance of the LIFO Reserve number? How much did the LIFO Reserve increase in 2003? What is the significance of this increase?
- Despite inflation, many companies continued to use FIFO for all or part of their inventories. Why do you believe this is the case?
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