Sarah Perreault Corp. sold 6,400 units of its product at $45 per unit in year 2013 and incurred operating expenses of $6 per unit in selling them. It began the year with 600 units in inventory and the following transactions took place during the fiscal year:

Jan 1 Beginning inventory 600 $18 per unit
Feb 20 Purchase 1,500 $19 per unit
May 16 Purchase 700 $20 per unit
Oct 3 Purchase 400 $21 per unit
Dec 11 Purchase 3,300 $22 per unit
Feb 22 Sale 750 $45 per unit
May 15 Sale 890 $45 per unit
Sep 11 Sale 775 $45 per unit
Dec 28 Sale 3,985 $45 per unit

Problem #1

Prepare comparative income statements similar to the ones found in your text at Exhibit 6.8 for the three inventory cost flow methods of FIFO, LIFO and weighted average. The company uses a perpetual inventory system and its income tax rate is 30%.

In calculating cost of sales, be sure to demonstrate the flow of inventory during the year and prove your ending inventory amount by using the inventory cost formula (BI + Purchases = GA EI = CGS).

Problem #2

Discuss in 500 words or less how the financial results from using the three alternative methods would change if Sarah Perreault had been experiencing declining costs in its purchases of inventory?

Problem #3

What advantages and disadvantages are offered by using LIFO and FIFO? Assume the continuing trend of increasing costs.