Evaluating Three Alternative Inventory Methods Based on Income and Cash Flow
The records of MEMBA Company showed the following for a particular item that sold for $11 per unit:
Transactions
Units
Amount
Inventory, January 1, 2013
Sale, January 10
Purchase, January 12
Sale, January 17
Purchase, January 27
400
(400)
600
(400)
500
700
(500)
500
(500)
200
400
$2,400
Inventory on hand, January 31
Sale, February 5
Purchase, February 10
Sale, February 18
Purchase, February 26
Inventory on hand, February 28
$4,200
$4,000
???
$4,500
$2,000
???
Required:
1.
Compute the following amounts, assuming the application of the FIFO, LIFO and Weighted Average
inventory costing methods. Assume a periodic inventory system. Show calculations and round ending
inventory ‘s unit cost to two decimals.
Ending Inventory
Units
Dollars
Cost of Goods Sold
Units
Dollars
January, 2013:
FIFO
Weighted Average
LIFO
February, 2013:
FIFO
Weighted Average
LIFO
2. Prepare a summarized income statement through gross profit under each inventory costing method.
FIFO
January, 2013:
Sales
Cost of goods sold
Gross profit
Weighted Average
LIFO
February, 2013:
Sales
Cost of goods sold
Gross profit
3. Of FIFO and LIFO, which method would result in the higher pretax income? Explain.
4. Of FIFO and LIFO, which method would result in the lower income tax expense? Explain, assuming a 20%
average tax rate.
5. Of FIFO and LIFO, which method would produce the more favorable cash position? Explain.
6.
Compute the following amounts, assuming the application of the FIFO or LIFO inventory costing
methods. Assume a perpetual inventory system. Show calculations and round ending inventory ‘s unit
cost to two decimals.
Ending Inventory
Units
Dollars
Cost of Goods Sold
Units
Dollars
January, 2013:
FIFO
LIFO
February, 2013:
FIFO
LIFO
7. Prepare a summarized perpetual income statement through gross profit for each inventory method.
FIFO
January, 2013:
Sales
Cost of goods sold
Gross profit
February, 2013:
Sales
Cost of goods sold
Gross profit
LIFO