The management of Tudor Ltd. asks your help in determining the comparative effects of the FIFO and average-cost inventory cost flow methods. For 2017, the accounting records provide the data shown below.
Inventory, January 1 (10,000 units).....................£ 35,000
Cost of 120,000 units purchased.........................501,000
Selling price of 105,000 units sold.......................695,000
Operating expenses........................................130,000
Units purchased consisted of 40,000 units at £4.00 on May 10; 60,000 units at £4.20 on August 15; and 20,000 units at £4.45 on November 20. Income taxes are 28%.
Instructions
(a) Prepare comparative condensed income statements for 2017 under FIFO and average cost. (Show computations of ending inventory.)
(b) Answer the following questions for management in the form of a business letter.
(1) Which inventory cost flow method produces the more meaningful inventory amount for the statement of financial position? Why?
(2) Which inventory cost flow method is more likely to approximate the actual physical flow of the goods? Why?
(3) How much more cash will be available for management under average-cost than under FIFO? Why?