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P7-3

P7-3. At the end of January 2014, the records of Rizal Industries showed the following for a particular item that sold at $16 per unit:. Part 1.

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P7-3

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  1. P7-3

  2. At the end of January 2014, the records of Rizal Industries showed the following for a particular item that sold at $16 per unit:

  3. Part 1 • Assuming the use of a periodic inventory system, prepare a summarized income statement through gross profit for the month of January under each method of inventory: (a) average cost, (b) FIFO, (c) LIFO, (d) specific identification. For specific identification, assume that the first sales was selected from the beginning inventory and the second sale was selected from the January 12 purchase. Round the average cost per unit to the nearest cent. Show the inventory computation in detail.

  4. Average Cost

  5. Average Cost

  6. FIFO

  7. FIFO

  8. FIFO

  9. LIFO

  10. LIFO

  11. LIFO

  12. Specific Identification

  13. Specific Identification

  14. Specific Identification

  15. Part 2 • Of FIFO and LIFO, which method would result in the higher pretax income? Which would result in higher EPS?

  16. Part 2 • Higher Pretax Income • FIFO (higher gross profit + assume profitable) • Higher EPS • EPS = Net income / average outstanding shares of common stock • Higher pretax income = higher net income (assuming taxes is fixed percentage of income) • FIFO

  17. Part 3 • Of FIFO and LIFO, which method would result in the lower income tax expense? Explain, assuming a 30% average tax rate.

  18. Part 3 • Lower income tax expense • LIFO • lower pretax income, and 30% average tax rate • Comparison • Assuming other expenses are $1000 • FIFO: $6700 - $1000 = $5700  30% of $5700 = $1710 • LIFO: $5880 - $1000 = $4880  30% of $4880 = $1464

  19. Part 4 • Of FIFO and LIFO, which method would produce the more favourable cash flow? Explain.

  20. Part 4 • Favourable cash flow • FIFO • Higher total ending balance

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