Evaluating the Choice among Three Alternative Inventory Methods Based on Cash Flow Effects
Following is partial information for the income statement of Lumber Company under three different inventory costing methods, assuming the use of a periodic inventory system:
| FIFO | LIFO | Average Cost |
Cost of goods sold
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Beginning inventory (400 units) | $11,200 | $11,200 | $11,200 |
Purchases (475 units) | 17,100 | 17,100 | 17,100 |
Goods available for sale |
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Ending inventory (545 units) |
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|
|
Cost of goods sold | $ | $ | $ |
Sales. 330 units: unit sales price. $50 |
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Expenses. $1,700 |
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Required:
1. Compute cost of goods sold under the FIFO, LIFO, and average cost inventory costing methods.
2. Prepare an income statement through pretax income for each method.
3. Rank the three methods in order of income taxes paid (favorable cash flow) and explain the basis for your ranking.
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