Question

P7-3 Evaluating Four Alternative Inventory Methods Based on Income and Cash Flow LO7-2, 7-3

At the end of January 2014, the records of Donner Company showed the following for a particular item that sold at $16 per unit:
Transactions Units Amount
Inventory, January 1, 2014 500 $ 2,365
Purchase, January 12 600 3,600
Purchase, January 26 160 1,280
Sale (370)
Sale (250)
Required:
1a. Compute Cost of Goods Sold under each method of inventory: average cost, FIFO, LIFO, and 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 unit price to 2 decimal places. Input all amounts as positive values.)
Input areas are shaded.
Average Cost Cost of Good Available for Sale Cost of Goods Sold
# of Units Cost per Unit Cost of Goods Available for Sale # of Units Sold Cost per Unit Cost of Goods Sold
Beginning inventory
Purchases:
January 12, 2014
January 26, 2014
Total
FIFO Cost of Goods Available for Sale Cost of Goods Sold
# of Units Cost per Unit Cost of Goods Available for Sale # of Units Sold Cost per Unit Cost of Goods Sold
Beginning inventory
Purchases:
January 12, 2014
January 26, 2014
Total
LIFO Cost of Goods Available for Sale Cost of Goods Sold
# of Units Cost per Unit Cost of Goods Available for Sale # of Units Sold Cost per Unit Cost of Goods Sold
Beginning inventory
Purchases:
January 12, 2014
January 26, 2014
Total
Specific Identification Cost of Goods Available for Sale Cost of Goods Sold
# of Units Cost per Unit Cost of Goods Available for Sale # of Units Sold Cost per Unit Cost of Goods Sold
Beginning inventory
Purchases:
January 12, 2014
January 26, 2014
Total
Required:
1b. Prepare a partial income statement under each method of inventory: (a) average cost, (b) FIFO, (c) LIFO, and (d) 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.
DONNER COMPANY
Partial Income Statement
For the Month Ended January 31, 2014
(a) (b) ( c ) (d)
Average Cost FIFO LIFO Specific Identification
Required:
2a. FIFO and LIFO, which method would result in the higher pretax income?
2b. FIFO and LIFO, which would result in the higher EPS?
3 FIFO and LIFO, which method would result in the lower income tax expense? Assume a 30 percent average tax rate.
4 FIFO and LIFO, which method would produce the more favorable cash flow?

Answer 1

The WipeOut Ski Company incurs a loss of $5 when producing and selling five units at $25 each, as the price per unit is lower than the average cost and marginal cost, signaling that they should reduce production.

Step-by-step explanation:

Evaluating Company Profitability

When considering the profitability of the WipeOut Ski Company producing and selling five units at $25 each, several key financial aspects must be examined:

1. Total Revenue: Five units at $25 each results in total revenue of $125.
2. Total Costs: The cost of producing five units is $130, leading to a net loss.
3. Profit or Loss: With the given costs, the company will realize a loss of $5 in total because the total cost exceeds total revenue.

Analyzing the financial situation at a glance:

• If the price per unit is less than the average cost per unit, the company incurs a loss.
• Here, the average cost is $26/unit, which when compared to a price of $25/unit, signals a loss of $1 per unit, resulting in total losses of $5.

Concerning the marginal unit:

• At these levels, since the marginal cost ($30) is higher than the price ($25), the marginal unit is not contributing to profit but is instead reducing it.
• This indicates that the production should be reduced to enhance profitability.