Impact of costing methods on net income LO₃ Cindy Lou Company was franchised on January 1 , 2002. At the end of its third year of operations, December 3 1 , 2004, management requested a study to determine what effect different materials inventory costing methods would have had on its reported net income over the three-year period.

The materials inventory account, using LIFO, FIFO, and moving average, would have had the following ending balances:

a. Assuming the same number of units in ending inventory at the end of each year, were material costs rising or falling from 2002 to 2004?

b. Which costing method would show the highest net income for 2002?

c. Which method would show the highest net income for 2004?

d. Which method would show the lowest net income for the three years combined?

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Materials Inventory Balances December 31 LIFO FIFO Average 2002 $20,000 $22,000 $21,000 2003 20,000 24,000 23.000 2004 20,000 30,000 27,667