The management of Zwick Inc. asks your help in determining the comparative effects

(>t the FIFO and LIFO inventor) cost flow methods. For 2006 the accounting records show these data.

Units purchased consisted of 35.000 units at $4.00 on Maj 10: 60.1MK) units at $4.20 on August 15: and 25.000 units at S4.50 on November 20. Income taxes are 28%.
Instructions

(a) Prepare comparative condensed income statements lor 2006 under FIFO and LIFO. (Show computations ol ending inventory.)

(b) Answer the following questions for management in the form of a business letter.
(1) Which inventor) cosl How method produces the most meaningful inventor) amount for the balance sheet? Why?

(2) Which inventory cost flow method produces the most meaningful net income? Why?
(3) Which inventory cost flow method is most likely to approximate the actual physical flow of the goods? Why?
(4) How much more cash will be available for management under LIFO than under FIFO?
Why'?
(5) How much of the gross profit under FIFO is illusory in comparison with the gross profit under LIFO?

Transcribed Image Text:

Inventory, January 1 (10,000 units) Cost of 120,000 units purchased Selling price of 95.000 units sold Operating expenses $ 35.000 504.500 665.000 120,000