Evaluating Four Alternative Inventory Methods Based on Income and Cash Flow (AP7-3) At the end of January of the current year, the records of Donner Company showed the following for a particular item that sold at $16 per unit: P7-3 LO7-2, 7- Transactions Units Amount Inventory, January 1 500 $2,365 Purchase, January 12 600 3,600 Purchase, January 26 160 1,280 Sale Sale (370) (250) Required: 1. Assuming the use of a periodic inventory system, prepare a summarized income statement through gross profit for the month of January under each method of inventory: (a) average cost (round the average cost per unit to the nearest cent), (b) FIFO, (c) LIFO, and (d) specific identification. For specific identification, assume that the first sale was selected from the beginning inventory and the second sale was selected from the January 12 purchase. Show the inventory computations in detail. 2. Between FIFO and LIFO, which method results in the higher pretax income? Which method results in the higher EPS? 3. Between FIFO and LIFO, which method results in the lower income tax expense? Explain, assuming a 20 percent average tax rate. 4. Between FIFO and LIFO, which method produces the more favorable cash flow? Explain. 2-19 PROJ