P$6\mathrm{.}3$B $($LO $2,3)($Apply perpetual FIFO and average cost; compare effects.$)$ Family Appliance

Mart Ltd$.$ opened for business on May $1$ and uses a perpetual inventory system. During May,

the company had the following purchases and sales for one of its products:

Instructions

a$.$ Determine the cost of goods sold and cost of ending inventory using $(1)$ FIFO and $(2)$

average cost. $($For average cost, use unrounded numbers in your calculations but

round to the nearest cent for presentation purposes in your answer.$)$

b$.$ What guidelines should Family Appliance Mart consider in choosing between the

FIFO and average cost formulas?

c$.$ Identify the cost formula the company should use if it wants to maximize gross profit

and net income and explain why.

d$.$ Explain which formula produces the higher ending inventory valuation.

e$.$ Explain which cost formula produces the higher cash flow.