Evaluating the Choice among Three Alternative Inventory Methods Based on Income and Cash Flow Effects
Daniel Company uses a periodic inventory system. Data for 2012: beginning merchandise inventory (December 31, 2011), 2,000 units at $38; purchases, 8,000 units at $40: expenses (excluding income taxes), $194,500: ending inventory per physical count at December 31, 2012, 1,800 units; sales, 8,200 units; sales price per unit, $75: and average income tax rate. 30 percent.
Required:
1. Compute cost of goods sold and prepare income statements under the FIFO, LIFO, and average cost inventory costing methods. Use a format similar to the following:
INVENTORY COSTING METHOD | ||||
Cost of Goods Sold | Units | FIFO | LIFO | Average Cost
|
Beginning inventory | _______ | $_______ | $_______ | $_______ |
Purchases | _______ | _______ | _______ | _______ |
Goods available for sale | _______ | _______ | _______ | _______ |
Ending inventory | _______ | _______ | _______ | _______ |
Cost of goods sold | _______ | $_______ | $_______ | $_______ |
2014Income Statement | FIFO | LIFO | Average Cost |
| $_______ | $_______ | $_______ |
Cost of goods sold | _______ | _______ | _______ |
Gross profit | _______ | _______ | _______ |
Expenses | _______ | _______ | _______ |
Pretax income | _______ | _______ | _______ |
Income tax expense | _______ | _______ | _______ |
Net income | $_______ | $_______ | $_______ |
2. Between FIFO and LIFO, which method is preferable in terms of (a) net income and (b) income taxes paid (cash flow)? Explain.
3. What would your answer to requirement (2) be, assuming that prices were falling? Explain.
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