Chapter 6, Problem 53E

Effects of Inventory Costing Methods

Jefferson Enterprises has the following income statement data available for 2019:

Jefferson uses a perpetual inventory accounting system and the average cost method. Jefferson is considering adopting the FIFO or LIFO method for costing inventory. Jefferson’s accountant prepared the following data:

Required:

1. Compute income before taxes, income taxes expense, and net income for each of the three inventory costing methods. (Round to the nearest dollar.)

2. CONCEPTUAL CONNECTION Why are the cost of goods sold and ending inventory amounts different for each of the three methods? What do these amounts tell us about the purchase price of inventory during the year?

3. CONCEPTUAL CONNECTION Which method produces the most realistic amount for net income? For inventory? Explain your answer.