How can companies use a cost flow method to justify price increases? Which cost flow method would…

You are provided with the following information for Mondello Inc. for the month of March 2011. Mondello Inc. uses the periodic method of accounting for its inventory transactions.

March 1 Beginning inventory 2,000 liters at a cost of 60¢ per liter.

March 3 Purchased 2,500 liters at a cost of 65¢ per liter.

March 5 Sold 2,200 liters for $1.05 per liter.

March 10 Purchased 4,000 liters at a cost of 72¢ per liter.

March 20 Purchased 2,500 liters at a cost of 80¢ per liter.

March 30 Sold 5,000 liters for $1.25 per liter.

Instructions

(a) Prepare partial income statements through gross profit, and calculate the value of ending inventory that would be reported on the balance sheet, under each of the following cost flow assumptions. Round ending Inventory and cost of goods sold to the nearest dollar.

(1) Specific identification method assuming:

(i) the March 5 sale consisted of 1,100 liters from the March 1 beginning inventory and 1,100 liters from the March 3 purchase; and

(ii) the March 30 sale consisted of the following number of units sold from beginning inventory and each purchase: 450 liters from March 1; 550 liters from March 3; 2,900 liters from March 10; 1,100 liters from March 20.

(2) FIFO.

(3) LIFO.

(b) How can companies use a cost flow method to justify price increases? Which cost flow method would best support an argument to increase prices?

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