Will gross profit under the average-cost method be higher or lower than FIFO? Than LIFO? 2 answers below »

The management of Felipe Inc. is reevaluating the appropriateness of using its present inventory cost flow method, which is average-cost. The company requests your help in determining the results of operations for 2014 if either the FIFO or the LIFO method had been used. For 2014, the accounting records show these data:

Inventories

Purchases and Sales

Beginning (7,000 units)

$14,000

Total net sales (180,000 units)

$747,000

Ending (17,000 units)

Total cost of goods purchased(190,000 units)

466,000

Purchases were made quarterly as follows.

Quarter

Units

Unit Cost

Total Cost

1

50,000

$2.20

$110,000

2

40,000

2.35

941000

3

40,000

2.50

100,000

4

60,000

2.70

162,000

190,000

$466,000

Operating expenses were $130,000, and the company"s income tax rate is 40%.

Instructions

(a) Prepare comparative condensed income statements for 2014 under FIFO and LIFO.

(b) Answer the following questions for management.

(1) Which cost flow method (FIFO or LIFO) produces the more meaningful inventory amount for the balance sheet? Why?

(2) Which cost flow method (FIFO or LIFO) produces the more meaningful net income? Why?

(3) Which cost flow method (FIFO or LIFO) is more likely to approximate the actual physical flow of goods? Why?

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

(5) Will gross profit under the average-cost method be higher or lower than FIFO? Than LIFO?

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