The management of National Inc. asks your help in determining the comparative effects of the FIFO and LIFO inventory cost flow methods. For 2017, the accounting records show these data.

Inventory, January 1 (10,000 units) .........................$ 35,000

Cost of 120,000 units purchased ............................ 468,500

Selling price of 98,000 units sold ........................... 750,000

Operating expenses ............................................ 124,000

Units purchased consisted of 35,000 units at $3.70 on May 10, 60,000 units at $3.90 on August 15, and 25,000 units at $4.20 on November 20. Income taxes are 28%.

Instructions

(a) Prepare comparative condensed income statements for 2017 under FIFO and LIFO. (Show computations of ending inventory.)

(b) Answer the following questions for management in the form of a business letter.

(1) Which inventory cost flow method produces the inventory amount that most closely approximates the amount that would have to be paid to replace the inventory? Why?

(2) Which inventory cost flow method produces the net income amount that is a more likely indicator of next period's net income? Why?

(3) Which inventory cost flow method is most likely to approximate the actual physical flow of the goods? Why?

(4) How much more cash will be available under LIFO than under FIFO? Why?

(5) How much of the gross profit under FIFO is illusionary in comparison with the gross profit under LIFO?