(Inventory cost flow assumptions and taxes, LO 2, 6) Sayabec Ltd.’s (Sayabec) purchases for 2003 were:

The beginning balance in inventory on January 1, 2003 was 12,000 units with a cost of $2.50 per unit. The inventory count on December 31, 2003 found that there were 11,000 units on hand at the end of the year. Sayabec uses a periodic inventory control system. During 2003 Sayabec had revenues of $246,000 and expenses other than the cost of sales and taxes of $100,000. Saybec pays taxes equal to 20% of its income before taxes.
Required:

a. Prepare income statements for 2003 for Sayabec using FIFO and average cost.
Your income statements should show the amount of taxes that the company has to pay for the income it earned in 2003. Taxes are calculated by multiplying income before taxes (revenue — all expenses except taxes) by the tax rate.

b. Which method would you recommend that Sayabec use if its primary objective of financial accounting is to minimize taxes? Explain your answer.

c. What are possible explanations as to why Sayabec would choose not to use the method you recommended in (b)?

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Date Quantity purchased Cost per unit March 1 8,000 $2.75 June 4 10,000 3.00 September 9 15,000 3.15 December 4 7,000 3.30