Income is to be evaluated under four different situations as follows:
a. Prices are rising:
(1) Situation A: FIFO is used.
(2) Situation B: LIFO is used.
b. Prices are falling:
(1) Situation C: FIFO is used.
(2) Situation D: LIFO is used.
The basic data common to all four situations are sales, 500 units for $12,000; beginning inventory, 300 units; purchases, 400 units; ending inventory, 200 units; and operating expenses, $4,000. The following tabulated income statements for each situation have been set up for analytical purposes:

Required:
1. Complete the preceding tabulation for each situation. In Situations A and B (prices rising), assume the following: beginning inventory, 300 units at $11 = $3,300; purchases, 400 units at $12 = $4,800. In Situations C and D (prices falling), assume the opposite; that is, beginning inventory, 300 units at $12 = $3,600; purchases, 400 units at $11 = $4,400. Use periodic inventory procedures.
2. Analyze the relative effects on pretax income and on net income as demonstrated by requirement 1 when prices are rising and when prices are falling.
3. Analyze the relative effects on the cash position for each situation.
4. Would you recommend FIFO or LIFO?Explain.

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PRICES RISING PRICES FALLING Situation A FIFO Situation B LIFO $12.000 Situation CSituation D FIFO LIFO Sales revenue 12.000 $12,000 $12,000 Cost of goods sold: Beginning inventory Purchases Goods available for sale Ending inventory Cost of goods sold Gross profit 3.300 4.800 8,100 2,400 5.700 6,300 4,000 2,300 690 S 1.610 4,000 4,000 4.000 xpenses Pretax income Income tax expense (30%) Net income