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.

Page $388$

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

$\backslash$table$[[,$PRICES RISING,PRICES FALLING$],[,\backslash$table$[[$Situation A$],[$FIFO$]],\backslash$table$[[$Situation B$],[$LIFO$]],$Situation C FIFO,Situation D LIFO$],[$Sales revenue,$$15,000,$$$15,000,$$$15,000,$$$15,000],[$Cost of goods sold:,,,,$],[$Beginning inventory,$3,300,?,?,?],[$Purchases$,4,800,?,?,?],[$Goods available for sale,$8,100,?,?,?],[$Ending inventory,$2,400,?,?,?],[$Cost of goods sold,$5,700,?,?,?],[$Gross profit,$9,300,?,?,?],[$Expenses$,4,000,4,000,4,000,4,000],[$Pretax income,$5,300,?,?,?],[$Income tax expense $(30\%),1,590,?,?,?],[$Net income,$$3,710,?,?,?]]$

Required:

Complete the preceding tabulation for each situation. In Situations A and B $($prices rising$),$ assume the following: beginning inventory, $300$ units at $$11=$$$3,300$; purchases, $400$ units at $$12=$$$4,800.$ In Situations $C$ and $D($prices falling$),$ assume the opposite; that is$,$ beginning inventory, $300$ units at $$12=$$$3,600$; purchases, $400$ units at $$11=$$$4,400.$ Use periodic inventory procedures.

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

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

Would you recommend FIFO or LIFO? Explain.