The management of Howland is reevaluating the appropriateness of using its present inventory cost flow method, which is average-cost. The company requests your help in determining the results of operations for 2012 if either the FIFO or the LIFO method had been used. For 2012, the accounting records show these data:
|
Inventories
|
Purchases and Sales
|
|
Beginning (10,000 units)
|
$22,500
|
Total net sales (220,000 units)
|
$862,000
|
|
Ending (20,000 units)
|
|
Total cost of goods purchased (230,000 units)
|
567,500
|
Purchases were made quarterly as follows.
|
Quarter
|
Units
|
Unit Cost
|
Total Cost
|
|
1
|
60,000
|
$2.30
|
$138,000
|
|
2
|
50,000
|
2.4
|
120,000
|
|
3
|
50,000
|
2.55
|
127,500
|
|
4
|
70,000
|
2.6
|
182,000
|
|
230,000
|
|
$567,500
|
Operating expenses were $147,000, and the company"s income tax rate is 32%.
Instructions
(a) Prepare comparative condensed income statements for 2012 under FIFO and LIFO. (Show computations of ending inventory.)
(b) Answer the following questions for management in business-letter form.
(1) Which cost flow method (FIFO or LIFO) produces the inventory amount that most closely approximates the amount that would have to be paid to replace the inventory? Why?
(2) Which cost flow method (FIFO or LIFO) produces the net income amount that is a more likely indicator of next period"s net income? Why?
(3) Which cost flow method (FIFO or LIFO) is more likely to approximate the actual physical flow of goods? Why?
(4) How much more cash will be available for management under LIFO than under FIFO? Why?
(5) Will gross profit under the average-cost method be higher or lower than FIFO? Than LIFO? (Note:It is not necessary to quantify your answer.)