Evaluating the Choice among Three Alternative Inventory Methods Based on Income and Cash Flow Effects

Daniel Company uses a periodic inventory system. Data for the current year: beginning merchandise inventory (ending inventory December 31, prior year), 2,080 units at $36; purchases, 7,820 units at $38; expenses (excluding income taxes), $194,000; ending inventory per physical count at December 31, current year, 1,670 units; sales, 8,230 units; sales price per unit, $75; and average income tax rate, 34 percent.

Required:

1. Compute cost of goods sold and prepare income statements under the FIFO, LIFO, and average cost inventory costing methods. (Round your final answers to nearest whole dollar. Do not round your intermediate calculations.)

	Inventory Costing Method
Cost of Goods Sold	Units	FIFO	LIFO	Average Cost
Beginning inventory
Purchases
Goods available for sale
Ending inventory
Cost of goods sold

Income Statement	FIFO	LIFO	Average Cost

2. Between FIFO and LIFO, which method is preferable in terms of (a) net income and (b) income taxes paid (cash flow)?

Net income
Income taxes paid

3. Between FIFO and LIFO, which method is preferable in terms of (a) net income and (b) income taxes paid (cash flow), assuming that prices were falling?

When prices are falling, the opposite effect occurs		produces higher net income
and less favorable cash flow than does