EFFECTS OF INVENTORY COSTING METHODS Jefferson Enterprises has the following income statement data available for 2009:

Sales revenue $737,200 Operating expenses 243,700 Interest expense 39,500 Income tax rate 34%

Jefferson uses a perpetual inventory accounting system and the average cost method.

Jefferson is considering adopting the FIFO or LIFO method for costing inventory.

Jefferson’s accountant prepared the following data:

If Average Cost Used If FIFO Used If LIFO Used Ending inventory $ 56,400 $ 73,200 $ 41,700 Cost of goods sold 401,600 384,800 416,300 Required:

. Compute income before taxes, income tax expense, and net income for each of the three inventory costing methods (rounded to the nearest dollar).

. Why are the cost of goods sold and ending inventory amounts different for each of the three methods? What do these amounts tell us about the purchase price of inventory during the year?

. Which method produces the most realistic amount for net income? For inventory?

Explain your answer.

Exercise