The management of Canterbury Ltd, a US-based company, is reassessing the appropriateness of its present inventory costing method, which is average cost. Management asks your help in determining the results of operations for 2016 if either the FIFO or the LIFO method had been used. For 2016 the accounting records show the following data. 

Purchases were made quarterly as follows. 

Operating expenses were $180 000, and the company’s income tax rate is 30%. 

Required

(a) Prepare comparative condensed statements of profit or loss for 2016 under FIFO and LIFO. (Show calculations of ending inventory.) 

(b) Answer the following questions for management:

1. Which inventory cost flow method produces the most meaningful inventory amount for the statement of financial position? Why?

2. Which inventory cost flow method produces the most meaningful profit? Why?

3. Which inventory cost flow method is most likely to approximate the actual physical flow of the goods? Why?

4. How much more cash will be available for management under LIFO than under FIFO? Why?

5. Will gross profit under the average cost method be higher or lower than FIFO? Than LIFO? 

Transcribed Image Text:

Inventories Beginning (10 000 units) Ending (? units) $52 500 Purchases and sales Total net sales (95 000 units) Total cost of goods purchased (120 000 units) $997 500 $753 000