Kao Camping Supplies is nearing the end of its first year of operations. The company uses a periodic inventory system and made inventory purchases of $176,250 during the year as follows:
Sales for the year will be 750 units for $410,000 revenue. Expenses other than cost of goods sold will be $105,000. The owner of the company is undecided about whether to adopt FIFO or weighted-average costing as the company’s method.
The company has storage capacity for 600 additional units of inventory. Inventory prices are expected to stay at $230 per unit for the next few months. The president is considering purchasing 150 additional units of inventory at $230 each before the end of the year. He wishes to know how the purchase would affect net income before taxes under both the FIFO and weighted-average costing methods.
Required
1. To help the owner make the decision, prepare income statements under FIFO costing and weighted-average costing, both without and with the year-end purchase of 150 units of inventory at $230 per unit.
2. Compare net income before taxes under FIFO costing without and with the year-end purchase. Make the same comparison under weighted-average costing. Under which method does the year-end purchase have the greater effect on net income before taxes?
3. If the company wanted to manipulate net income for the year, is one method more manipulative than the other?
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