The management of Aar Co. SA asks your help in determining the comparative effects of the FIFO and average-cost inventory cost flow methods. For 2017, the accounting records provide the data shown below.
Inventory, January 1 (10,000 units)........................CHF 47,000
Cost of 100,000 units purchased.................................532,000
Selling price of 85,000 units sold................................750,000
Operating expenses................................................160,000
Units purchased consisted of 35,000 units at CHF5.10 on May 10; 35,000 units at CHF5.30 on August 15; and 30,000 units at CHF5.60 on November 20. Income taxes are 30%.
Instructions
(a) Prepare comparative condensed income statements for 2017 under FIFO and average cost. (Show computations of ending inventory.)
(b) Answer the following questions for management.
(1) Which inventory cost flow method produces the more meaningful inventory amount for the statement of financial position? Why?
(2) Which inventory cost fl ow method is more likely to approximate actual physical flow of the goods? Why?
(3) How much additional cash will be available for management under average-cost than under FIFO? Why?