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(Solution) - Income is to be evaluated under four different situations as

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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, 500 units for $12,000; beginning inventory, 300 units; purchases, 400 units; ending inventory, 200 units; and operating expenses, $4,000. The following tabulated income statements for each situation have been set up for analytical purposes:



Required:
1. Complete the preceding tabulation for each situation. In Situations A and B (prices rising), assume the following: beginning inventory, 300 units at $11 = $3,300; purchases, 400 units at $12 = $4,800. In Situations C and D (prices falling), assume the opposite; that is, beginning inventory, 300 units at $12 = $3,600; purchases, 400 units at $11 = $4,400. 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.

 







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This question was answered on: Jul 11, 2017

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