P6-4A The management of Reiko Co. is reevaluating the appropriateness

| June 14, 2016

Question
P6-4AThe management of Reiko 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 2012, 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 2012 under FIFO and LIFO. (Show computations of ending inventory.)

(b)Answer the following question 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) in 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?

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

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