The management of Gresa Inc. is reevaluating the appropriateness of using its present inventory cost flow method, which is average-cost using a periodic inventory system. The company requests your help in determining the results of operations for 2022 if either the FIFO or the LIFO method had been used. For 2022, the accounting records show these data:

Purchases were made quarterly as follows.

Instructions

a. Prepare comparative condensed income statements for 2022 under FIFO and LIFO through gross profit. (Show computations of ending inventory.)

b. Answer the following questions for management.

1. Which cost flow method (FIFO or LIFO) produces the most up-to-date inventory amount for the balance sheet? Explain.

2. Which cost flow method (FIFO or LIFO) produces the most up-to-date gross profit? Explain.

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

4. Will gross profit under the average-cost method be higher or lower than FIFO? Than LIFO? It is not necessary to quantify your answer.

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Purchases and Sales Total net sales (180,000 units) Total cost of goods purchased (190,000 units) Inventories Beginning (7,000 units) Ending (17,000 units) $747,000 $14,000 466,000 Quarter Units 50,000 40,000 40,000 60,000 190,000 Unit Cost Total Cost $110,000 $2.20 2.35 2.50 2.70 3 94,000 100,000 4 162,000 $466,000