Chapter 7, Problem 7.7E

Analyzing and Interpreting the Financial Statement Effects of LIFO and FIFO

Broadhead Company uses a periodic inventory system. At the end of the annual accounting period, December 31 of the current year, the accounting records provided the following information for product 2:

	Units	Unit Cost
Inventory, December 31, prior year	3,000	$ 9
For the current year
Purchase, April 11	9,000	10
Purchase, June 1	7,000	15
Sales ($50 each)	10,000
Operating expenses (excluding income tax expense) $ 195,000

Required:

1. 1. Prepare a separate income statement through pretax income that details cost of goods sold for (a) Case A: FIFO and (b) Case B: LIFO. For each case, show the computation of the ending inventory and cost of goods sold. (Hint: Set up adjacent columns for each case.)
2. 2. Compare the pretax income and the ending inventory amounts between the two cases. Explain the similarities and differences.
3. 3. Which inventory costing method may be preferred for income tax purposes? Explain.