Chapter 7, Problem 7.10E

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

LO7-2, 7-3 Following is partial information for the income statement of Arturo Technologies 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 @ $30)	$12,000	$12,000	$12,000
Purchases (400 units @ $20)	8,000	8,000	8,000
Goods available for sale
Ending inventory (500 units)
Cost of goods sold	$	$	$
Sales, 300 units; unit sales price, $50
Expenses. $2,500

Required:

1. 1. Compute cost of goods sold under the FIFO, LIFO, 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 preference based on income taxes paid (favorable cash flow) and explain the basis for your ranking.