Analyze the relative effects on pretax income and on net income as demonstrated by requirement (1)...

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Evaluating the LIFO and FIFO Choice When Costs Are Rising and Falling - Income is to be evaluated under four different situations as follows: a. Prices are rising: (1) Situation A: FIFO is used. (2) Situation B: LIFO is used. b. Prices are falling: (1) Situation C: FIFO is used. (2) Situation D: LIFO is used. The basic data common to all four situations are: sales, 510 units for $13,260
beginning inventory, 340 units
purchases, 410 units
ending inventory, 240 units
and operating expenses, $5,000. The following tabulated income statements for each situation have been set up for analytical purposes: PRICES RISING PRICES RISING PRICES FALLING PRICES FALLING Situation A FIFO Situation B LIFO Situation C FIFO Situation D LIFO Sales revenue $13,260 $13,260 $13,260 $13,260 Cost of goods sold: Beginning inventory 3,060 ? ? ? Purchases 4,100 ? ? ? Goods available for sale 7,160 ? ? ? Ending inventory 2,400 ? ? ? Cost of goods sold 4,760 ? ? ? Gross profit 8,500 ? ? ? Expenses 5,000 5,000 5,000 5,000 Pretax income 3,500 ? ? ? Income tax expense (30%) 1,050 ? ? ? Net income $2,450 Required: 1. Complete the preceding tabulation for each situation. In Situations A and B (prices rising), assume the following: beginning inventory, 340 units at $9 = $3,060
purchases, 410 units at $10 = $4,100. In Situations C and D (prices falling), assume the opposite
that is, beginning inventory, 340 units at $10 = $3,400
purchases, 410 units at $9 = $3,690. Use periodic inventory procedures. 2. Analyze the relative effects on pretax income and on net income as demonstrated by requirement (1) when prices are rising and when prices are falling. 3. Analyze the relative effects on the cash position for each situation. 4. Would you recommend FIFO or LIFO? Explain.

 

Solution ID:565784 | This paper was updated on 26-Nov-2015

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