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?