Analyzing and Interpreting the Financial Statement Effects of LIFO and FIFO

Element Company uses a periodic inventory system. At the end of the annual accounting period, December 31, 2012, the accounting records provided the following information for product 2:

Required:
1. Prepare a separate income statement through pretax income that details cost of goods sold for
(a) Case A: FIFO and
(b) Case B: LIFO. For each case, show the computation of the ending inventory.
2. Compare the pretax income and the ending inventory amounts between the two cases. Explain the similarities and differences.
3. Which inventory costing method may be preferred for income tax purposes?Explain.

Transcribed Image Text:

Units Unit Cost $12 Inventory, December 31, 2011 For the year 2012: Purchase, April 11 Purchase, June 1 Sales ($50 each) Operating expenses (excluding income tax expense) 3,000 9,000 10 15 11,000 $195,000