This week homework:

1. What is the format of the American Income Statement?

In a simple American Income Statement, list

Sales (Revenue) first. Then subtract Cost of

Goods Sold. The result is called Gross

Margin. Subtract Operating Expenses from

Gross Margin. The result is called Net Income.

2. I could't understand.

2. What would the Gross Margin be if

Delaware Parts used LIFO?

The gross margin would be:

Revenues $30,000

less: Cost of Goods Sold

Beginning Inventory $ 0

plus: Purchases 37,000

Available For Sale 37,000

less: Ending Inventory 22,000

Cost of Goods Sold 15,000

Gross Margin $15,000

Explanation

(I did not expect you to write this. I did

expect you to understand this.)

Delaware Parts bought 300 units of

inventory (purchases). They sold 100 units

(revenue). They have 200 units left (ending

inventory). They had no units on hand at the

beginning of the month (beginning

inventory).

Under LIFO, the most recent purchases are

the first units sold. The oldest purchases

remain in ending inventory. Delaware Parts

has 200 units of ending inventory. Look at

the cost of the oldest purchases to find the

cost of the ending inventory. The first and

second purchases were for 200 units. That is

the amount of the ending inventory. So the

cost of the first two purchases is the cost of

the ending inventory under LIFO. The cost

of the first two purchases is:

#1 (100 units x $100) $10,000

#2 (100 units x $120) 12,000

Total $22,000

The Cost of Goods Sold is usually the largest

expense a company has. The method used to

value inventory (FIFO or LIFO) makes a big

difference in the amount of the Cost of

Goods Sold. If the Cost of Goods Sold is

large, Net Income is smaller. If the Cost of

Goods Sold is small, Net Income is larger.

Companies can manipulate (change) earnings

simply by carefully selecting the method of

inventory valuation.