The accounting records of Blue Bird Co. showed the following balances at January 1, Year 2:

Cash..............................................................................................$30,000
Beginning inventory (100 units @ $50, 70 units @ $55) ............8,850
Common stock ..............................................................................20,000
Retained earnings .........................................................................18,850

Transactions for Year 2 were as follows:

Purchased 100 units @ $54 per unit.
Sold 220 units @ $80 per unit.
Purchased 250 units @ $58 per unit.
Sold 200 units @ $90 per unit.
Paid operating expenses of $3,200.
Paid income tax expense. The income tax rate is 30%.

Required
a. Organize the class into three sections, and divide each section into groups of three to five students. Assign each section one of the cost flow methods, FIFO, LIFO, or weighted average. The company uses the perpetual inventory system.

Group Tasks
Determine the amount of ending inventory, cost of goods sold, gross margin, and net income after income tax for the cost flow method assigned to your section. Also prepare an income statement using that cost flow assumption.

Class Discussion
b. Have a representative of each section put its income statement on the board. Discuss the effect that each cost flow method has on assets (ending inventory), net income, and cash flows. Which method is preferred for tax reporting? For financial reporting? What restrictions are placed on the use of LIFO for tax reporting?