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 follows:

December 31 Year 1 Year 2 Year 3 Lower of FIFO UFO Cost FIFO Cost Cost or Market $40,200 $40,000 $37,000 36,400 36,000 34,000 41,800 44,000 44,000 4fi.
In answering each of the following questions, indicate how you deduced the answer. You may assume that in any one year, prices mewed 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 I?

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 basis1.'