At the end of January of the current year, the records of Donner Company showed the following for a particular item that sold at $17.00 per unit:

At the end of January of the current year, the records of Donner Company showed the following for a particular item that sold at $17.00 per unit:

Transactions	Units	Amount
Inventory, January 1	500	$	2,800
Purchase, January 12	660		5,016
Purchase, January 26	120		1,152
Sale	(400)
Sale	(200)

Required:

1a. 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. Assume that the company uses periodic inventory system. (Round unit price to 2 decimal places. Input all amounts as positive values.)

 

1b. Prepare a partial income statement under each method of inventory: (a) average cost, (b) FIFO, (c) LIFO, and (d) 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 Assume that the company uses periodic inventory system.
 

Explanation:

1b.

Sales revenue = 600 units @ $17.00 = $10,200.

 

2a. Of FIFO and LIFO, which method would result in the higher pretax income?

FIFO 

 

2b. Of FIFO and LIFO, which would result in the higher EPS?

FIFO 

3. Of FIFO and LIFO, which method would result in the lower income tax expense? Assume a 30 percent average tax rate.

LIFO 

4. Of FIFO or LIFO, which method would produce the more favorable cash flow?

LIFO, because of it produces lower Income tax expense 

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