The management of Peoria Ltd, a US-based company, is reassessing the appropriateness of using its present inventory cost flow method, which is average cost. Management requests 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 these data: 

Purchases were made quarterly as follows: 

Operating expenses were $147 000, and the company’s income tax rate is 32%. 

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 in business-letter form:

1. Which cost flow method (FIFO or LIFO) produces the more meaningful inventory amount for the statement of financial position? Why?

2. Which cost flow method (FIFO or LIFO) produces the more meaningful profit? Why?

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

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Inventories Beginning (15 000 units) Ending (? units) $34000 Purchases and sales Total net sales (225 000 units) Total cost of goods purchased (230 000 units) $865 000 $578 500