Castana Company is considering changing inventory cost flow methods. Castanas primary objective is to minimize its tax

Question:

Castana Company is considering changing inventory cost flow methods. Castana’s primary objective is to minimize its tax liability. Currently, the firm uses weighted average cost.

Data for 2012 are provided.

Beginning inventory (2,000 units) .......$ 10,000

Purchases

5,000 units at $6 each............$ 30,000

4,000 units at $6.50 each .......... 26,000

6,000 units at $7 each........... 42,000

Sales

15,000 units at $10 each$150,000

Operating expenses were $12,000 and the company’s tax rate is 25%.

Requirements

1. Prepare the income statement for 2012 using each of the following methods:

a. FIFO periodic

b. LIFO periodic

2. Which method provides the more current balance sheet inventory balance at December 31, 2012? Explain your answer.

3. Which method provides the more current cost of goods sold for the year ended

December 31, 2012? Explain your answer.

4. Which method provides the better inventory turnover ratio for the year? Explain your answer.

5. In order to meet its goal, what is your recommendation to Castana Company? Explain your answer.

Inventory Turnover Ratio
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Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...