Situation D:

BrightStar Company reported the following inventory records for June 2012:

Problem 2, Table 3: BrightStar Company Inventory Records

Date	Activity	# of Units	Cost/Unit
June 1	Beginning balance	200	$40
June 5	Purchase	600	$42
June 8	Sale @ $100 per unit	500
June 17	Purchase	400	$45
June 23	Sale @ $100 per unit	500

Selling, administrative, and depreciation expenses for the month were $20,000. BrightStar's tax rate is 35 percent. Use this information and the table above to complete the following for BrightStar Company:

Calculate the cost of ending inventory and the cost of goods sold under each of the following methods:

a. First in, first out (FIFO).

b. Last in, first out (LIFO).

c. Weighted average.

Using your answers from question 1 above, answer the following:

a. What is the gross profit percentage under the FIFO method?

b. What is net income under the LIFO method?

c. Which method would you recommend to BrightStar for tax purposes? Explain your recommendation.

d. If BrightStar also used the method that you recommended for tax purposes on its balance sheet, would BrightStar's current ratio suffer, compared to the use of FIFO?

BrightStar uses the lower of FIFO cost or market method to value its inventory for reporting purposes at the end of the month. If inventory had a market replacement value of $44 per unit, what would BrightStar report in its balance sheet for inventory? Why?