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P7-3

P7-3. Average Cost. Average Cost. FIFO. FIFO. FIFO. L IFO. L IFO. L IFO. Specific Identification. Specific Identification. Specific Identification. b. Higher Pretax Income FIFO (higher gross profit + assume profitable) Higher EPS

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P7-3

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  1. P7-3

  2. Average Cost

  3. Average Cost

  4. FIFO

  5. FIFO

  6. FIFO

  7. LIFO

  8. LIFO

  9. LIFO

  10. Specific Identification

  11. Specific Identification

  12. Specific Identification

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

  14. c • 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

  15. d • Favourable cash flow • FIFO • Higher total ending balance

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