Question

Evaluating the Choice among Three Alternative Inventory Methods Based on Cash Flow Effects LO7-2, 7-3Following 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:Required:1. Compute cost of goods sold under the FIFO, LIFO, and average cost inventory costing methods. (Do not round intermediate calculations.)COGSBeg inventory (400 units @ $28)Purchases (475 units @35)Goods availableending inventory (525)COGS2. Prepare an income statement through pretax income for each method.Sales, 350 units; unit sales price, $50; Expenses, $1,700NEED HELP PREPARING INCOME STATEMENT3. Rank the three methods in order of income taxes paid (favorable cash flow).

Answer 1

FIFO

Weighted average

LIFO

Step-by-step explanation:

Beg inventory (400 units @ $28) $ 11,200

Purchases (475 units @ $35) $ 16,625

Goods available 875 units $ 27,825

W/A 27,825 / 875 = $31.8

LIFO will use first the newest units thus, the more expenses ($35) making a higher COGS

while FIFO will use first the oldest units thus, more cheap( $28) making lower COGS

W/A will fit between them

As FIFO makes COGS lower the income will be higher thus, taxes too.

W/A will follow as used 31.8 units

and then, LIFO with the higher COGS