The management of Morale Company is re-evaluating the appropriateness of using its present inventory cost flow method, which is average cost. They request your help in determining the result sof operations for 2001 if either FIFO or the LIFO method had been used. For 2001, the accounting records show the following data:

Inventories: Beginning (15,000 units) $34,000

Purchased and Sales:
Total net sales (225,000 units) $865,000
Total cost sales (230,000 units) $578,500

Purchases were made quarterly as follows:

Quarter Units Unit Cost Total Cost
1 60,000 $2.30 $138,000
2 50,000 $2.50 $125,000
3 50,000 $2.60 $130,000
4 70,000 $2.65 $185,500

Requirements:

1) Prepare a comparative condensed income statement for 2001 under FIFO and LIFO

2) Which cost flow method (FIFO or LIFO) produces the most meaningful inventory for the balance sheet? Why?

3) Which cost flow method produces the most meaningful net income? Why?

4) Which of the methods is more likely to approximate actual physical flow of the goods? Why?

5) How much additional cash flow will be available under the LIFO than FIFO? Why?

6) will gross profit under the average cost method be higher or lower than FIFO and LIFO?