The following information can be found in ABC Co.'s financial statements.
$\begin{array}{lrr}
&\underline{ 2006}&\underline{ 2005}\
\text { Finished goods } & \$ 251,690 & \$ 195,360 \
\text { Work-in-process and } & & \
\text { purchased parts } & 245,123 & 186,432 \
\text { Raw materials } & 136,568 & 106,789 \
\text { Total FIFO value } & 633,381 & 488,581 \
\begin{array}{l}
\text { Less excess of current } \
\text { cost over stated LIFO }
\end{array} & & \
\text { value } &\underline{ 62,951}&\underline{71,186} \

\text { Inventories } & \$570,430&\$417,395\
\text { Retained earnings }&\$3,526,000&\$3,159,000
\end{array}$
Assume a tax rate of 35%. Inventories valued using the LIFO method represented approximately 80% of consolidated inventories.
-What will be the value of inventory for 2006 if ABC used FIFO valuation?
A)$633,485
B)$570,430
C)$633,381
D)$488,581

Question

The following information can be found in ABC Co.'s financial statements.
$\begin{array}{lrr}
&\underline{ 2006}&\underline{ 2005}\
\text { Finished goods } & \$ 251,690 & \$ 195,360 \
\text { Work-in-process and } & & \
\text { purchased parts } & 245,123 & 186,432 \
\text { Raw materials } & 136,568 & 106,789 \
\text { Total FIFO value } & 633,381 & 488,581 \
\begin{array}{l}
\text { Less excess of current } \
\text { cost over stated LIFO }
\end{array} & & \
\text { value } &\underline{ 62,951}&\underline{71,186} \

\text { Inventories } & \$570,430&\$417,395\
\text { Retained earnings }&\$3,526,000&\$3,159,000
\end{array}$
Assume a tax rate of 35%. Inventories valued using the LIFO method represented approximately 80% of consolidated inventories. 
-What will be the value of inventory for 2006 if ABC used FIFO valuation?
A)$633,485
B)$570,430
C)$633,381
D)$488,581

Quizplus · Accepted Answer

Since the question asks for the value of inventory if FIFO valuation was used, we need to reverse the effect of LIFO valuation. The difference between the LIFO cost and the FIFO cost is known as the LIFO reserve. We can calculate the LIFO reserve by multiplying the LIFO inventory balance by the LIFO reserve percentage (100% - 80% = 20%).

LIFO reserve = LIFO inventory * 20% = $233,831 * 20% = $46,766

To convert from LIFO to FIFO, we add the LIFO reserve to the LIFO inventory balance, giving us the FIFO inventory balance:

FIFO inventory = LIFO inventory + LIFO reserve = $233,831 + $46,766 = $280,597

Finally, we need to apply the tax rate of 35% to get the after-tax value of the inventory:

After-tax FIFO inventory = FIFO inventory * (1 - tax rate) = $280,597 * (1 - 0.35) = $182,516

Therefore, the correct answer is C) $633,381.

The Following Information Can Be Found in ABC Co Assume a Tax Rate of 35