Evaluating Four Alternative Inventory Methods Based on Income and Cash Flow (AP7-2)
At the end of January 2011. the records of Donner Company showed the following for a particular item that sold at $16 per unit:
Transactions | Units | Amount |
Inventory, January 1, 2011 | 500 | $2,500 |
Purchase, January 12 | 600 | 3,600 |
Purchase, January 26 | 160 | 1,280 |
Sale | (370) |
|
Sale | (250) |
|
Required:
1. Assuming the use of a periodic inventory system, prepare a summarized income statement through gross profit for the month of January under each method of inventory: (a) average cost, (b) FIFO, (c) LIFO, and (d) specific identification. For specific identification, assume that the first sale was selected from the beginning inventory and the second sale was selected from the January 12 purchase. Round the average cost per unit to the nearest cent. Show the inventory computations in detail.
2. Of FIFO and LIFO, which method would result in the higher pretax income? Which would result in the higher EPS?
3. Of FIFO and LIFO, which method would result in the lower income tax expense? Explain, assuming a 30 percent average tax rate.
4. Of FIFO and LIFO, which method would produce the more favorable cash flow? Explain.
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