Evaluating Four Alternative Inventory Methods Based on Income and Cash Flow
At the end of January 2014, the records of Donner Company showed the following for a particular item that sold at $16 per unit:
|
Transactions
|
Units
|
Amount
|
|
|
Inventory, January 1, 2014
|
500
|
$ 2,365
|
4.73
|
|
Purchase, January 12
|
600
|
3,600
|
6
|
|
Purchase, January 26
|
160
|
1,280
|
8
|
|
Sale
|
(370)
|
|
|
|
Sale
|
(250)
|
|
|
Required:
1. Compute Cost of Goods Sold under each method of inventory: average cost, FIFO, LIFO, and specific identification. For specific identification, assume that the first sale was selected from the beginning inventory and the second sale was selected from the January 12 purchase.
2a. FIFO and LIFO, which method would result in the higher pretax income?
2b. FIFO and LIFO, which would result in the higher EPS?
3. FIFO and LIFO, which method would result in the lower income tax expense? Assume a 30 percent average tax rate.
4. FIFO and LIFO, which method would produce the more favorable cash flow?