The Stern Company uses a periodic inventory system. Inventory on December 31, 20X1, consisted of 10,000 units @ $10 = $100,000. Purchases during 20X2 were 13,000 units. Sales were 12,000 units for sales revenue of $19 per unit.

1. Prepare a four-column comparative statement of gross margin for 20X2:

a. Assume purchases were at $12 per unit. Assume FIFO and then LIFO.

b. Assume purchases were at $8 per unit. Assume FIFO and then LIFO.

2. Explain the differences between LIFO and FIFO gross margin in both (a) and (b) in requirement 1.

3. Assume an income tax rate of 40%. Suppose all transactions were for cash. Which inventory method in requirement (1a) would result in more cash for Stern Company and by how much?

4. Assume an income tax rate of 40%. Suppose all transactions were for cash. Which inventory method in requirement (1b) would result in more cash for Stern Company and by how much?