Reconstructing underlying events from ending inventory amounts. (Adapted from CPA examination.) Burch Corporation began a merchandising business on January 1, Year 1. It acquired merchandise costing \(\$ 100,000\) in Year 1, \(\$ 125,000\) in Year 2, and \(\$ 135,000\) in Year 3. Information about Burch Corporation's inventory as it would appear on the balance sheet under different inventory methods appears below:

In answering each of the following questions, indicate how you deduced the answer. You may assume that in any one year, prices moved only up or down but not both.

a. Did prices go up or down in Year 1?

b. Did prices go up or down in Year 3?

c. Which inventory method would show the highest income for Year 1?

d. Which inventory method would show the highest income for Year 2?

e. Which inventory method would show the highest income for Year 3?

f. Which inventory method would show the lowest income for all three years considered as a single period?
g. For Year 3, how much higher or lower would income be on the FIFO cost basis than on the lower-of-cost-or-market basis?

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December 31 LIFO Cost FIFO Cost Lower of FIFO Cost or Market Year 1 .. Year 2 Year 3 . $40,200 $40,000 $37,000 36,400 36,000 34,000 41,800 44,000 44,000