Heller Bottling Company
Inventory flow assumptions over several periods and income taxes
Heller Bottling Company began business in 2008. Inventory units purchased and sold for the first year of operations and each of the following four years follow:
|
Units Purchased
|
Cost per Units
|
Units Sold
|
|
2008
|
10,000
|
$12
|
5,000
|
|
2009
|
12,000
|
16
|
16,000
|
|
2010
|
5000
|
18
|
2,000
|
|
2011
|
10,000
|
21
|
10,000
|
|
2012
|
2000
|
23
|
6,000
|
Inadequate cash flows forced Heller Bottling Company to cease operations at the end of 2012.
a. Compute cost of goods sold for each of the five years if the company uses the following:
(1) LIFO cost flow assumption
(2) FIFO cost flow assumption
(3) Averaging cost flow assumption
b. Does the choice of a cost flow assumption affect total net income over the life of a business? Explain your answer.
c. If the choice of a cost flow assumption does not affect net income over the life of a business, how does the choice of LIFO give rise to a tax benefit?