Chapter 7, Problem 10E

Evaluating the Choice among Three Alternative Inventory Methods Based on Cash Flow Effects

Following is partial information for the income statement of Audio Solutions Company under three different inventory costing methods, assuming the use of a periodic inventory system:

	FIFO	LIFO	Average Cost
Cost of goods sold
Beginning inventory (400 units @ $28)	$11,200	$11,200	$11,200
Purchases (475 units @ $35)	16,625	16,625	16,625
Goods available for sale
Ending inventory (525 units)
Cost of goods sold	$	$	$
Sales, 350 units; unit sales price, $50
Expenses, $1,700

Required:

1. 1. Compute cost of goods sold under the FIFO, UFO, and average cost inventory costing methods.
2. 2. Prepare an income statement through pretax income for each method.
3. 3. Rank the three methods in order of income taxes paid (favorable cash flow) and explain the basis for your ranking.