Problem 1: Determining and Evaluating the Effects on the Balance Sheet, the Income Statement and the Cash Flow Statement of Four Different Cost Flow Assumptions for Inventory

Problem 1: Determining and Evaluating the Effects on the Balance Sheet, the Income Statement and the Cash Flow Statement of Four Different Cost Flow Assumptions for Inventory

At the end of January 2012, the records of Shelton and Blair showed the following for a particular item that sold at $20 per unit:

Problem 1: Records of Sheldon and Blair

Transactions	Units	Total Amount
Inventory, January 1, 2011	500 @ $6.00	$3,000
Purchase, January 12	600 @ $7.00	$4,200
Purchase, January 26	200 @ $7.10	$1,420
Sale	(400 units sold for $20 each)	Â
Sale	(300 units sold for $20 each)	Â

Based on the information provided in the table above, complete the following. To complete this problem, you may wish to use the Assessment 6, Problem 1 Template, which is linked in the Resources under the Capella Resources heading.

1. Assuming the use of a periodic inventory system, prepare a summarized income statement through gross profit for the month of January under each method of inventory:
   1. Average cost.
   2. FIFO.
   3. LIFO.
   4. Specific identification. For specific identification, assume that the first sale was selected from the beginning inventory and the second sale was selected from the January 12 purchase. Round the average cost per unit to the nearest cent. Show the inventory computations in detail.
2. Of FIFO and LIFO, which method would result in the higher pretax income? Which would result in the higher EPS?
3. Of FIFO and LIFO, which method would result in the lower income tax expense? Explain, assuming a 35 percent average tax rate.
4. Of FIFO and LIFO, which method would produce the more favorable cash flow? Explain.