The management of Weigel Inc. asks your help in determining the comparative effects of the FIFO and LIFO inventory cost flow methods. For 2014 the accounting records show these data.
Inventory, January 1 (4,000 units) $ 16,000 Cost of 105,000 units purchased 470,500 Selling price of 100,000 units sold 900,000 Operating expenses 185,000 Units purchased consisted of 35,000 units at $4.21 on March 20; 65,000 units at $4.60 on July 24; and 5,000 units at $4.83 on December 12. Income taxes are 30%.

Instructions

(a) Prepare comparative condensed income statements for 2014 under FIFO and LIFO.

(Show computations of ending inventory.)

(b) Answer the following questions for management in the form of a business letter.

(1) Which inventory cost flow method produces the most meaningful inventory 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 under LIFO than under FIFO? Why?

(5) How much of the gross profit under FIFO is illusionary in comparison with the gross profit under LIFO?AppendixLO1