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EXERCISE 3 (25 points) Darius Co. uses a perpetual inventory system. The company's beginning inventory of a particular product and its purchases during the month
EXERCISE 3 (25 points) Darius Co. uses a perpetual inventory system. The company's beginning inventory of a particular product and its purchases during the month of January were as follows: Quantity Unit Cost Total Cost Beginning inventory (Jan. 1) 10 27.50 275 Purchase (Jan. 15)... 10 38.50 385 Purchase (Jan. 23)..... 10 30.00 300 Total 30 960 On January 20, Darius sells 20 units of this product. The other 10 units remain in inventory at January 31. 1. Compute the cost of goods sold relating to the sale on January 20th and the ending inventory of units at January 31, end of the fiscal year, using the following cost flow assumptions: (a) Average cost. (5 points) (b) FIFO. (5 points) (c) LIFO. (5 points) 2. Using the cost figures computed above, answer the following questions: (a) Which of the three cost flow assumptions will result in the company reporting the lowest net income for the current year? Would this always be the case? Explain. (2.5 points) (b) Which of the three cost flow assumptions will result in the highest income tax expense for the year? Would you expect this usually to be the case? Explain. (2.5 points) 3. Describe the reason for using a cost flow assumption to value an inventory. (5 points)
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