Kowalski Company began operations in 2007 by selling a single product. Data on purchases and sales for

Question:

Kowalski Company began operations in 2007 by selling a single product. Data on purchases and sales for the year were as follows:

On January 6, 2008, the president of the company, Jolly Zondra, asked for your advice on costing the 4,000-unit physical inventory that was taken on December 31, 2007. Moreover, since the firm plans to expand its product line, she asked for your advice on the use of a perpetual inventory system in the future.
1. Determine the cost of the December 31, 2007, inventory under the periodic system, using the
(a) First-in, first-out method,
(b) Last-in, first-out method, and
(c) Average cost method.
2. Determine the gross profit for the year under each of the three methods in (1).
3. a. Explain varying viewpoints why each of the three inventory costing methods may best reflect the results of operations for 2007.
b. Which of the three inventory costing methods may best reflect the replacement cost of the inventory on the balance sheet as of December 31, 2007?
c. Which inventory costing method would you choose to use for income tax purposes? Why?
d. Discuss the advantages and disadvantages of using a perpetual inventory system. From the data presented in this case, is there any indication of the adequacy of inventory levels during theyear?

Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...