Evaluating Four Alternative Inventory Methods Based on Income and Cash Flow (P7-3)
At the end of January 2012, the records of NewRidge Company showed the following for a particular item that sold at $16 per unit:
Transactions | Units | Amount |
Inventory. January 1.2012 | 120 | $ 960 |
Purchase. January 12 | 380 | 3,420 |
Purchase. January 26 | 200 | 2,200 |
Sale | (100) |
|
Sale | (140) |
|
Required:
1. Assuming the use of a periodic inventory system, prepare a summarized income statement through gross profit for January 2012 under each method of inventory: (a) weighted 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. Show the inventory computations (including for ending inventory) 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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