P6-4A The management of Felipe Inc. is reevaluating the appropriateness of using its present inventory cost ow method, which is average-cost.

P6-4A The management of Felipe Inc. is reevaluating the appropriateness of using its present inventory cost fl ow method, which is average-cost. The company requests your help in determining the results of operations for 2015 if either the FIFO or the LIFO method had been used. For 2015, the accounting records show these data: Inventories Purchases and Sales Beginning (7,000 units) $14,000 Total net sales (180,000 units) $747,000 Ending (17,000 units) Total cost of goods purchased (190,000 units) 466,000 Purchases were made quarterly as follows. Quarter Units Unit Cost Total Cost 1 50,000 $2.20 $110,000 2 40,000 2.35 94,000 3 40,000 2.50 100,000 4 60,000 2.70 162,000 190,000 $466,000

Operating expenses were $130,000, and the company’s income tax rate is 40%. Instructions (a) Prepare comparative condensed income statements for 2015 under FIFO and LIFO. (Show computations of ending inventory.)

(b) Answer the following questions for management. (1) Which cost fl ow method (FIFO or LIFO) produces the more meaningful inventory amount for the balance sheet? Why? (2) Which cost fl ow method (FIFO or LIFO) produces the more meaningful net income? Why? (3) Which cost fl ow method (FIFO or LIFO) is more likely to approximate the actual physical fl ow of goods? Why? (4) How much more cash will be available for management under LIFO than under FIFO? Why? (5) Will gross profi t under the average-cost method be higher or lower than FIFO? Than LIFO? (Note: It is not necessary to quantify your answer.)