The management of Birchwood Inc. is evaluating the appropriateness of using its present inventory cost determination method, which is FIFO. The company requests your help in comparing the results of operations for 2024 if weighted average were used instead. For 2024, you have been provided with the following information: Perpetual inventory records:

Instructions
a. Prepare comparative income statements for 2024 under FIFO and weighted average.
b. Answer the following questions:
1. Explain the advantages and disadvantages of using weighted average instead of FIFO, assuming a period of rising prices.
2. Assume Birchwood Inc. is a hardware and home improvement retailer. Which cost formula would better match the physical flow of merchandise?
3. Assume instead that Birchwood Inc. is a grocery retailer. Which cost formula would better match the physical flow of merchandise?
4. Based on your answer to part (a), which cost formula produces a higher net income?

Taking It Further

How much more cash will be available under weighted average than under FIFO? Explain.

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Beginning inventory (7,000 units) Ending inventory (17,000 units) Cost of goods available for sale Cost of goods sold Trial balance: Net sales Operating expenses $1,120,500 195,000 Weighted Average $ 21,000 63,750 720,000 656,250 FIFO $ 27,000 89,250 726,000 636,750