The following information pertains to the inventory of Steelman Company for Year 2:

During Year 3, Steelman sold 2,500 units of inventory at $85 per unit and incurred $38,600 of operating expenses. Steelman currently uses the FIFO method but is considering a change to LIFO. All transactions are cash transactions. Assume a 25 percent income tax rate. Steelman started the period with cash of $85,000, inventory of $22,000, common stock of $45,000, and retained earnings of $62,000.

Required
a. Prepare income statements using FIFO and LIFO.
b. Determine the amount of income tax that Steelman would pay using each cost flow method.
c. Determine the cash flow from operating activities under FIFO and LIFO.
d. Why is the cash flow from operating activities different under FIFO and LIFO?

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500 units @ $28 Jan. 1 Beginning inventory Purchased Purchased 1,800 units @ $32 400 units @ $35 Apr. 20 Oct. 5