The management of Gisel Co., SA is reevaluating the appropriateness of using its present inventory cost flow method. They request your help in determining the results of operations for 2017 if either the FIFO method or the average-cost method had been used. For 2017, the accounting records show the following data.
Inventories Purchases and Sales
Beginning (10,000 units).........€22,800.........Total net sales (225,000 units).........€865,000
Ending (15,000 units)................................Total cost of goods purchased
.............................................................................(230,000 units)...........578,500
Purchases were made quarterly as follows.
Quarter Units Unit Cost Total Cost
1................60,000...............€2.30..................€138,000
2................50,000.................2.50....................125,000
3................50,000.................2.60....................130,000
4................70,000.................2.65....................185,500
................230,000........................................€578,500
Operating expenses were €147,000, and the company's income tax rate is 32%.
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 cost flow method (FIFO or average-cost) produces the more meaningful inventory amount for the statement of financial position? Why?
(2) Which cost flow method (FIFO or average-cost) 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?