Chapter 6, Problem 6.4AP

(a)

To determine

In First-in-First-Out method, the cost of initial purchased items are sold first. The value of the ending inventory consists the recent purchased items.

In Last-in-First-Out method, the cost of last purchased items are sold first. The value of the closing stock consists the initial purchased items.

The income statement: This is a financial statement that shows the net income earned or net loss suffered by a company through reporting all the revenues earned and expenses incurred by the company over a specific period of time. An income statement is also known as an operations statement, an earnings statement, a revenue statement, or a profit and loss statement. The net income is the excess of revenue over expenses.

To Prepare: The comparative condensed income statements for 2017 under FIFO and LIFO.

(b) (1)

To determine

To Explain: the reason for the method of inventory cost flow which produces the inventory amount that most closely approximates the amount that would have to be paid to replace the inventory.

(2)

To determine

To Explain: the reason for the method of inventory cost flow which produces the net income amount that is a more likely indicator of next period’s net income.

(3)

To determine

To Explain: the reason for the method of inventory cost flow which is most likely to approximate the actual physical flow of the goods.

(4)

To determine

To explain: the reason for the excess of cash available under LIFO than under FIFO.

(5)

To determine

To explain: the amount of gross profit under FIFO that is illusionary in comparison with the gross profit under LIFO.