2024 – The management of Morales Co is reevaluating the appropriateness of using its present

The management of Morales Co. is reevaluating the appropriateness of using its present inventory cost flow method, which is average-cost.They request your help in determining the results of operations for 2010 if either the FIFO method or the LIFO method had been used. For 2010, the accounting records show the following data.

Inventories		Purchases and Sales
Beginning (15,000 units)	$32,000	Total net sales (215,000 units)	$865,000
Ending (30,000 units)		Total cost of goods purchased
		(230,000 units)	595,000

Purchases were made quarterly as follows.

Quarter	Units	Unit Cost	Total Cost
1	60,000	$2.40	$144,000
2	50,000	2.50	125,000
3	50,000	2.60	130,000
4	70,000	2.80	196,000
	230,000		$595,000

Operating expenses were $147,000, and the company’s income tax rate is 34%.

Instructions

(a) Prepare comparative condensed income statements for 2010 under FIFO and LIFO. (Show computations of ending inventory.)

(b) Answer the following questions for management.

(1) Which cost flow method (FIFO or LIFO) produces the more meaningful inventory amount for the balance sheet? Why?

(2) Which cost flow method (FIFO or LIFO) produces the more meaningful net income? Why?

(3) Which cost flow method (FIFO or LIFO) is more likely to approximate actual physical flow of the goods? Why?

(4) How much additional cash will be available for management under LIFO than under FIFO? Why?

(5) Will gross profit under the average-cost method be higher or lower than (a) FIFO and (b) LIFO? (Note: It is not necessary to quantify your answer.