Chapter 7, Problem 16E

Analyzing and Interpreting the Financial Statement Effects of Periodic FIFO, LIFO, and Weighted Average Cost

Orion Iron Corp. tracks the number of units purchased and sold throughout each year but applies its inventory costing method at the end of the year, as if it uses a periodic inventory system. Assume its accounting records provided the following information at the end of the annual accounting period, December 31.

Transactions	Units	Unit Cost
a. Inventory, Beginning For the year:	300	$12
b. Purchase, April 11	900	10
c. Purchase, June 1	800	13
d. Sale, May 1 (sold for $40 per unit)	300
e. Sale, July 3 (sold for $40 per unit)	600
f. Operating expenses (excluding income tax expense), $19,500

Required:

1. 1. Calculate the number and cost of goods available for sale.
2. 2. Calculate the number of units in ending inventory.
3. 3. Compute the cost of ending inventory and cost of goods sold under (a) FIFO, (b) LIFO, and (c) weighted average cost.
4. 4. Prepare an Income Statement that shows the FIFO method in one column, the LIFO method in another column, and the weighted average method in a final column. Include the following line items in the income statement: Sales, Cost of Goods Sold, Gross Profit, Operating Expenses, and Income from Operations.
5. 5. Compare the Income from Operations and the ending inventory amounts that would be reported under the three methods. Explain the similarities and differences.
6. 6. Which inventory costing method minimizes income taxes?

E7-16 (Supplement 7A) Calculating Cost of Ending Inventory and Cost of Goods Sold under Perpetual FIFO and LIFO

Refer to the information in E7-6. Assume Orion Iron applies its inventory costing method perpetually at the time of each sale. Calculate the cost of ending inventory and the cost of goods sold using the FIFO and LIFO methods.