The management of Patel Co$.$ is reevaluating the appropriateness of using its present inventory cost fl ow method, which is average$-$cost$.$ They request your help in determining the results of operations for $2017$ if either the FIFO method or the LIFO method had been used. For $2017,$ the accounting records show the following data.

Inventories Purchases and Sales

Beginning $(15,000$ units$)....$$$32,000$ Total net sales $(217,000$ units$).....$ $$865,000$

Ending $(28,000$ units$)$ Total cost of goods purchased

$(230,000$ units$)......................600,000$

Purchases were made quarterly as follows.

Quarter Units Unit Cost Total Cost

$160,000$ $$2\mathrm{.}40$ $$144,000$

$250,0002\mathrm{.}50125,000$

$350,0002\mathrm{.}70135,000$

$470,0002\mathrm{.}80196,000$

$230,000$ $$600,000$

Operating expenses were $$147,000,$ and the company$$s income tax rate is $34\%.$

Instructions

$($a$)$ Prepare comparative income statements for $2017$ under FIFO and LIFO.

$($Show computations of ending inventory.$)$

$($b$)$ Answer the following questions for management.

$(1)$ Which cost flow method $($FIFO or LIFO$)$ produces the more meaningful

inventory amount for the balance sheet? Why?

$(2)$ Which cost flow method $($FIFO or LIFO$)$ produces the more meaningful net income? Why?

$(3)$ Which cost flow method $($FIFO or LIFO$)$ is more likely to approximate actual physical flow of the goods? Why?

$(4)$ How much additional cash will be available for management under LIFO than under FIFO? Why?

$(5)$ Will gross profit under the average$-$cost method be higher or lower than

$($i$)$ FIFO and $($ii$)$ LIFO? $($Note: It is not necessary to quantify your answer.$)$

Working Papers Prob $6-4$B

Patel CO$.$

Condensed Income Statement

For the Year Ended December $31,2017$

FIFO LIFO

Sales Revenue $865,000865,000$

Cost of Goods Sold

Beginning Inventory $32,00032,000$

Cost of Goods Purchased $600,000600,000$

Cost of Goods Available for Sale $632,000632,000$

Ending Inventory

Cost of Goods Sold

Gross Profit

Operating Expenses $147,000147,000$

Income Before Income Taxes

Income Tax Expense $(34\%)55,89652,088$

Net Income $108,504101,112$

Below $-$ Indicate ONE $-$ either FIFO or LIFO as your answer.

$($b$)(1)...$ The FIFO or LIFO method produces the most meaningful inventory amount for the balance sheet because:

$($b$)(2)...$ The FIFO or LIFO method produces the most meaningful net incvome because:

$($b$)(3)...$ The FIFO or LIFO method is most likely to approximate actual physical flow of the inventory because:

$($b$)(4)$ There will be $\_\_\_\_\_\_\_\_\_\_\_$ additional cash available under LIFO because:

$($b$)(5)$ Gross profit under the average cost method will be higher than FIFO or LIFO and conversely will be lower than FIFO or LIFO method.