Problem - The management of Utley Inc. asks your help in determining the comparative effects of the FIFO and LIFO inventory cost flow methods. For 2011 the accounting records show these data.
Inventory, January 1 (8,775 units) $ 35,100
Cost of 122,900 units purchased 516,540
Selling price of 99,400 units sold 685,860
Operating expenses 129,900
Units purchased consisted of 36,000 units at $4.00 on May 10; 61,700 units at $4.20 on August 15; and 25,200 units at $4.50 on November 20. Income taxes are 30%.
Prepare comparative condensed income statements for 2010 under FIFO and LIFO.
Answer the following questions.
(1) Which inventory cost flow method produces the most meaningful inventory amount for the balance sheet?
(2) Which inventory cost flow method produces the most meaningful net income?
(3) Which inventory cost flow method is most likely to approximate the actual physical flow of the goods?
(4) How much more cash will be available for management under LIFO than under FIFO?
(5) How much of the gross profit under FIFO is illusionary in comparison with the gross profit under LIFO?