Prespatou Inc. (Prespatou) operates in a part of the computer industry where the cost of inventory has been falling recently. The cost of inventory purchased by Prespatou over the last year is summarized below. Prespatou values its inventory at the lower of cost and net realizable value.

Assume that purchases are made at the start of a month before any sales occur during that month and that Prespatou uses a periodic inventory system.

Required:

a. Calculate cost of sales for the year ended September 30, 2017 and ending inventory on September 30, 2017 for Prespatou using the average cost and FIFO cost formulas.

b. Which cost formula is most attractive for an accounting objective of income maximization?

c. Which cost formula is most attractive for an accounting objective of tax minimization?

d. Compare the relative values under the two cost formulas of ending inventory and cost of sales in this situation versus a situation where prices are rising. What is different between the two situations?

e. Apply the lower of cost and NRV rule to the year-end inventory. Assume that Prespatou’s selling costs for inventory are $120 per unit.

Transcribed Image Text:

Date Quantity Cost per unit Selling price per unit Purchases Opening inventory 70 $950 October 1, 2016 144 900 January 2, 2017 108 860 April 1, 2017 84 810 July 2, 2017 170 775 Sales October-December, 2016 162 $1,710 January-March, 2017 116 1,620 April-June, 2017 86 1,550 July-September, 2017 158 1,390