E7-9 (Inventory flow assumptions over several periods and income taxes) V 9 Heller Bottling Company began business
Question:
E7-9
(Inventory flow assumptions over several periods and income taxes)
V 9 Heller Bottling Company began business in 1993. Inventory units purchased and sold for the
* first year of operations and each of the following four years follow.
Units Purchased Cost per Unit Units Sold 1993 10,000 $12 5,000 >, 1995 -- 5,000 18 2,000 Hdoo 1996 10,000 21 10,000 H,cc° 1997 2,000 23 6,000 o Inadequate cash flows forced the Heller Bottling Company to cease operations at the end of 1997. REQUIRED: a. Compute Cost of Goods Sold for each of the five years if the company uses the following: (1) LIFO cost flow assumption (2) FIFO cost flow assumption (3) Averaging cost flow assumption b. Does the choice of a cost flow assumption affect total net income over the life of a busi¬ ness? Explain your answer. c. If the choice of a cost flow assumption does not affect net income over the life of a busi¬ ness, how does the choice of a cost flow assumption give rise to a tax benefit?
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