which of the three assumptions gives rise to the highest net income and ending inven 615124

The financial statement and income tax effects of averaging, FIFO, and LIFO

The purchase schedule for Lumbermans and Associates is as follows:

The inventory balance as of the beginning of the year was $15,000 (15,000 units @ $1), and an inventory count at year-end indicated that 11,000 items were on hand. Sales and expenses (excluding cost of goods sold) totaled $55,000 and $15,000, respectively. The federal income tax is 30 percent of taxable income.

REQUIRED:

a. Prepare three income statements, one under each of the assumptions: FIFO, average, and LIFO.

b. How many tax dollars would be saved by using LIFO instead of FIFO?

c. Assume that the market value of an inventory item dropped to $1.35 as of year-end. Apply the lower-of-cost-or-market rule, and provide the appropriate journal entry (if necessary) under the FIFO, averaging, and LIFO assumptions.

d. Repeat (a) above assuming that the costs per item were as follows:

Which of the three assumptions gives rise to the highest net income and ending inventory amounts now? Why?