P$7-4$

LO$7-2,7-3$

Evaluating the LIFO and FIFO Choice When Costs Are Rising and Falling $($AP$7-4)$

Income is to be evaluated under four different situations as follows:

a$.$ Prices are rising:

$(1)$ Situation A: FIFO is used.

$(2)$ Situation B: LIFO is used.

b$.$ Prices are falling:

$(1)$ Situation C: FIFO is used.

$(2)$ Situation D: LIFO is used.

The basic data common to all four situations are sales, $500$ units for $\backslash (\backslash$$ $15,000\backslash )$; beginning inventory, $300$ units; purchases, $400$ units; ending inventory, $200$ units; and operating expenses, $\backslash (\backslash$$ $4,000\backslash ).$ The following tabulated income statements for each situation have been set up for analytical purposes: $\backslash$begin$\{$tabular$\}\{|$c$|$c$|$c$|$c$|$c$|\}$

$\backslash$hline & $\backslash$multicolumn$\{2\}\{|$c$|\}\{$PRICES RISING$\}$ & $\backslash$multicolumn$\{2\}\{|$l$|\}\{$PRICES FALLING$\}\backslash \backslash$

$\backslash$hline & Situation A FIFO & Situation B LIFO & Situation C FIFO & Situation D LIFO $\backslash \backslash$

$\backslash$hline Sales revenue & $\backslash$$$15,000$ & $\backslash$$$15,000$ & $\backslash$$$15,000$ & $\backslash$$$15,000\backslash \backslash$

$\backslash$hline Cost of goods sold: & & & & $\backslash \backslash$

$\backslash$hline Beginning inventory & $3,300$ & $?$ & $?$ & $?\backslash \backslash$

$\backslash$hline Purchases & $4,800$ & $?$ & $?$ & $?\backslash \backslash$

$\backslash$hline Goods available for sale & $8,100$ & $?$ & $?$ & $?\backslash \backslash$

$\backslash$hline Ending inventory & $2,400$ & $?$ & $?$ & $?\backslash \backslash$

$\backslash$hline Cost of goods sold & $5,700$ & $?$ & $?$ & $?\backslash \backslash$

$\backslash$hline Gross profit & $9,300$ & $?$ & $?$ & $?\backslash \backslash$

$\backslash$hline Expenses & $4,000$ & $4,000$ & $4,000$ & $4,000\backslash \backslash$

$\backslash$hline Pretax income & $5,300$ & $?$ & $?$ & $?\backslash \backslash$

$\backslash$hline Income tax expense $(30\backslash \%)$ & $1,590$ & $?$ & $?$ & $?\backslash \backslash$

$\backslash$hline Net income & $\backslash$$$3,710$ & $?$ & $?$ & $?\backslash \backslash$

$\backslash$hline

$\backslash$end$\{$tabular$\}$

Required: inventory procedures.

$2.$ Analyze the relative effects on pretax income and net income as demonstrated by requirement $(1)$ when prices are rising and when prices are falling.

$3.$ Analyze the relative effects on the cash position for each situation.

$4.$ Would you recommend FIFO or LIFO? Explain.

P$7-5$