Following is partial information for the income statement of Arturo Technologies Company under three different inventory costing methods, assuming the use of a periodic inventory system:

Following is partial information for the income statement of Arturo Technologies Company under three different inventory costing methods, assuming the use of a periodic inventory system:
 

Required:

1. Compute cost of goods sold under the FIFO, LIFO, and average cost inventory costing methods.

Prepare an income statement through pretax income for each method.

    Sales, 400 units; unit sales price, $60; Expenses, $1,100

Explanation:

1.

	FIFO			LIFO			Average Cost
Cost of goods sold:
Beginning inventory (550 units @ $30)	$	16,500		$	16,500		$	16,500
Purchases (550 units @ $20)		11,000			11,000			11,000
Goods available for sale		27,500			27,500			27,500
Ending inventory (700 units)		15,500			19,500			17,500
Cost of goods sold (400 units)	$	12,000		$	8,000		$	10,000

Computation of ending inventory:

        FIFO : (550 units × $20) + (150 units × $30) = $15,500.

        LIFO : (550 units × $30) + (150 units × $20) = $19,500.

        Average : [(550 units @ $30) + (550  units @ $20)] ÷ 1,100 units

                    = $27,500 ÷ 1,100 units = $25 per unit.

                    $25 × 700 units = $17,500.

Cost of goods sold computations:

        FIFO : (400 units @ $30) = $12,000.

        LIFO : (400 units @ $20) = $8,000.

        Average : [(550 units @ $30) + (550  units @ $20)] ÷ 1,100 units

                    = $27,500 ÷ 1,100 units = $25 per unit.

                    $25 × 400 units = $10,000.

2.

Sales revenue = $60 × 400 = $24,000

3.

Ranking in order of favorable cash flow: The higher rankings are given to the methods that produce the lower income tax expense because the lower the income tax expense the higher the cash savings.

(1) FIFO–produces the lowest pretax income and as a result the lowest income tax. This result causes the highest cash savings on income tax.

(2) Weighted average–produces next lower pretax income.

(3) LIFO–produces the highest pretax income, hence the highest amount of cash to be paid for income tax.

The above comparative effects occurred because prices were falling. If prices were rising the three methods would have produced the opposite ranking.