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P7-3 Evaluating Four Alternative Inventory Methods Based on Income and Cash Flow LO7-2, 7-3 At the end of January 2014, the records of Donner Company showed the following for a particular item that sold at $16 per unit: Transactions Inventory, January 1, 2014 Purchase, January 12 Purchase, January 26 Sale Sale Units 500 600 160 (370) (250) $ Amount 2,365 3,600 1,280 Required: 1a. Compute Cost of Goods Sold under each method of inventory: average cost, FIFO, LIFO, and 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. (Round unit price to 2 decimal places. Input all amounts as positive values.) Input areas are shaded. Average Cost Cost of Good Available for Sale # of Units Cost per Unit Cost of Goods Sold Cost of Goods Available for Sale # of Units Sold Cost per Unit Cost of Goods Sold Beginning inventory Purchases: January 12, 2014 January 26, 2014 Total FIFO Cost of Goods Available for Sale # of Units Cost per Unit Cost of Goods Sold Cost of Goods Available for Sale # of Units Sold Cost per Unit Cost of Goods Sold Beginning inventory Purchases: January 12, 2014 January 26, 2014 Total LIFO Cost of Goods Available for Sale # of Units Cost per Unit Cost of Goods Sold Cost of Goods Available for Sale # of Units Sold Cost per Unit Cost of Goods Sold Beginning inventory Purchases: January 12, 2014 January 26, 2014 Total Cost of Goods Available for Sale Specific Identification # of Units Cost per Unit Cost of Goods Sold Cost of Goods Available for Sale # of Units Sold Cost per Unit Cost of Goods Sold Beginning inventory Purchases: January 12, 2014 January 26, 2014 Total Required: 1b. Prepare a partial income statement under each method of inventory: (a) average cost, (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. DONNER COMPANY Partial Income Statement For the Month Ended January 31, 2014 (a) (b) (c) (d) Average Cost FIFO LIFO Specific Identification Required: 2a. FIFO and LIFO, which method would result in the higher pretax income? 2b. FIFO and LIFO, which would result in the higher EPS? 3 FIFO and LIFO, which method would result in the lower income tax expense? Assume a 30 percent average tax rate. 4 FIFO and LIFO, which method would produce the more favorable cash flow? P7-3 Evaluating Four Alternative Inventory Methods Based on Income and Cash Flow LO7-2, 7-3 At the end of January 2014, the records of Donner Company showed the following for a particular item that sold at $16 per unit: Transactions Inventory, January 1, 2014 Purchase, January 12 Purchase, January 26 Sale Sale Units 500 $ 600 160 (370) (250) Amount 2,365 3,600 1,280 Required: 1a. Compute Cost of Goods Sold under each method of inventory: average cost, FIFO, LIFO, and 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. (Round unit price to 2 decimal places. Input all amounts as positive values.) Input areas are shaded. Average Cost Cost of Good Available for Sale # of Units Cost per Unit Cost of Goods Sold Cost of Goods # of Units Sold Available for Sale Cost per Unit Cost of Goods Sold Beginning inventory Purchases: January 12, 2014 January 26, 2014 Total FIFO Cost of Goods Available for Sale # of Units Cost per Unit Beginning inventory Cost of Goods Sold Cost of Goods Available for Sale # of Units Sold 500 600 $0 January 26, 2014 160 $0 1,260 $0 Cost of Goods Sold $0 January 12, 2014 Cost per Unit Purchases: Total LIFO 0 Cost of Goods Available for Sale # of Units Cost per Unit Beginning inventory Cost of Goods Sold Cost of Goods # of Units Sold Available for Sale Cost per Unit Cost of Goods Sold 500 Purchases: January 12, 2014 600 January 26, 2014 160 Total 1,260 Specific Identification - Cost of Goods Available for Sale # of Units Beginning inventory $ Cost per Unit 0 Cost of Goods Available for Sale # of Units Sold Cost per Unit Purchases: Total 600 January 26, 2014 160 1,260 $ 4,040 Cost of Goods Sold 500 January 12, 2014 $ - 0 Required: 2a. FIFO and LIFO, which method would result in the higher pretax income? 2b. FIFO and LIFO, which would result in the higher EPS? 3 FIFO and LIFO, which method would result in the lower income tax expense? Assume a 30 percent average tax rate. 4 FIFO and LIFO, which method would produce the more favorable cash flow? Cost of Goods Sold