Chapter 6, Problem 4E

To determine

Concept Introduction:

Perpetual Inventory System: The perpetual inventory system records and updates the inventory after each and every transaction. The inventory balance is updated after each transaction and it is kept up to date at every time.

Methods of inventory valuation: There are several methods of inventory valuation. Some important methods are explained as follows:

• Specific identification method: Under this method the cost of goods sold and ending inventory units are identifiable and the cost is calculated accurately for each unit sold and in the inventory.

• Weighted Average method: Under this method, the cost per unit of the inventory is calculated as weighted average cost per unit and the cost of goods sold and inventory is calculated with the help of weighted average cost per unit.

• FIFO method: FIFO Stands for First In First Out. Under this method, the units purchased first are assumed to be sold first and cost of goods sold is calculated accordingly. The ending inventory in the method includes the latest units purchased.

• LIFO method: LIFO Stands for Last In First Out. Under this method, the latest units purchased are assumed to be sold first and cost of goods sold is calculated accordingly. The ending inventory in the method includes the oldest units purchased.

Requirement:

To prepare: The Comparative Income Statement showing net income under each method of inventory valuation

To determine

Requirement 1:

To identify: The method of inventory valuation that yields the highest net income

To determine

Requirement 2:

To compare: The net income using the weighted average method with FIFO and LIFO

To determine

Requirement 3:

To identify: The method which would yield highest net income if the costs were rising instead of falling.