At the end of December 2020, the accounting records of XYZ firm present the following transactions for a particular merchandise that sold at €20 per unit:
Transaction Units Amount
Inventory, 1/12/2020 200 2,000 €
Purchase, 10/12/2020 150 1,800 €
Purchase, 15/12/2020 120 1,800 €
Purchase, 23/12/2020 170 2,720 €
Sale 180
Sale 120
In addition, the level of operating expenses in December is €1,500 and the tax rate is 20%.
The firm has decided to distribute the after-tax profits to shareholders.
Required:
1. If XYZ firm uses a periodic inventory system, prepare a summarized income statement for December 2020 under each inventory cost flow assumption: 

(a) weighted average, 

(b) FIFO, 

(c) LIFO, 

(d) specific identification. 

For specific identification, assume that the first sale was out of the beginning inventory and the second sale was out of the December 23 purchase. Exhibit inventory calculations in detail. (12%)
2. Which inventory cost flow assumption would produce more favorable cash flows in December? (3%)
3. Assume that the per unit net realizable price is €8. Which inventory cost flow assumption would produce higher level of pre-tax income? (3%)

B. Discuss the effects of FIFO and LIFO on income statement and balance sheet.

Answer rating: 100% (QA)

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