| P7-3 Evaluating Four Alternative Inventory Methods Based on Income and Cash Flow LO7-2, 7-3 |
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| At the end of January 2014, the records of Donner Company showed the following for a particular item that sold at $16 per unit: |
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| Transactions | Units | Amount | |||||||
| Inventory, January 1, 2014 |
500 | $ 2,365 | |||||||
| Purchase, January 12 | 600 | 3,600 | |||||||
| Purchase, January 26 | 160 | 1,280 | |||||||
| Sale | (370) | ||||||||
| Sale | (250) | ||||||||
| Required: | |||||||||
| 1a. | Compute Cost of Goods Sold under each method of inventory: average cost, FIFO, LIFO, and specific identification. For specific |
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| identification, assume that the first sale was selected from the beginning inventory and the second sale was selected from the |
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| January 12 purchase. (Round unit price to 2 decimal places. Input all amounts as positive values.) |
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| Input areas are shaded. | |||||||||
| Average Cost | Cost of Good Available for Sale | Cost of Goods Sold | |||||||
| # of Units | Cost per Unit | Cost of Goods Available for Sale |
# of Units Sold | Cost per Unit | Cost of Goods Sold |
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| Beginning inventory | |||||||||
| Purchases: | |||||||||
| January 12, 2014 | |||||||||
| January 26, 2014 | |||||||||
| Total | |||||||||
| FIFO | Cost of Goods Available for Sale | Cost of Goods Sold | |||||||
| # of Units | Cost per Unit | Cost of Goods Available for Sale |
# of Units Sold | Cost per Unit | Cost of Goods Sold |
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| Beginning inventory | |||||||||
| Purchases: | |||||||||
| January 12, 2014 | |||||||||
| January 26, 2014 | |||||||||
| Total | |||||||||
| LIFO | Cost of Goods Available for Sale | Cost of Goods Sold | |||||||
| # of Units | Cost per Unit | Cost of Goods Available for Sale |
# of Units Sold | Cost per Unit | Cost of Goods Sold |
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| Beginning inventory | |||||||||
| Purchases: | |||||||||
| January 12, 2014 | |||||||||
| January 26, 2014 | |||||||||
| Total | |||||||||
| Specific Identification | Cost of Goods Available for Sale | Cost of Goods Sold | |||||||
| # of Units | Cost per Unit | Cost of Goods Available for Sale |
# of Units Sold | Cost per Unit | Cost of Goods Sold |
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| Beginning inventory | |||||||||
| Purchases: | |||||||||
| January 12, 2014 | |||||||||
| January 26, 2014 | |||||||||
| Total | |||||||||
| Required: | |||||||||
| 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. |
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| DONNER COMPANY | |||||||||
| Partial Income Statement | |||||||||
| For the Month Ended January 31, 2014 | |||||||||
| (a) | (b) | ( c ) | (d) | ||||||
| Average Cost | FIFO | LIFO | Specific Identification | ||||||
| Required: | |||||||||
| 2a. | FIFO and LIFO, which method would result in the higher pretax income? |
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| 2b. | FIFO and LIFO, which would result in the higher EPS? |
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| 3 | FIFO and LIFO, which method would result in the lower income tax expense? Assume a 30 percent average tax rate. |
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| 4 | FIFO and LIFO, which method would produce the more favorable cash flow? |
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