The management of Gresa Inc. is reevaluating the appropriateness of using its present inventory cost flow method, which is average-cost. The company requests your help in determining the results of operations for 2020 if either the FIFO or the LIFO method had been used. For 2020, the accounting records show these data:
Purchases were made quarterly as follows.
Operating expenses were $130,000, and the company’s income tax rate is 40%.
Instructions
a. Prepare comparative condensed income statements for 2020 under FIFO and LIFO. (Show computations of ending inventory.)
b. Answer the following questions for management.
1. Which cost flow method (FIFO or LIFO) produces the more meaningful inventory amount for the balance sheet? Why?
2. Which cost flow method (FIFO or LIFO) produces the more meaningful net income? Why?
3. Which cost flow method (FIFO or LIFO) is more likely to approximate the actual physical flow of goods? Why?
4. How much more cash will be available for management under LIFO than under FIFO? Why?
5. Will gross profit under the average-cost method be higher or lower than FIFO? Than LIFO? It is not necessary to quantify your answer.
