You are the chief accountant of Pan American Industries, Inc. In anticipation of the upcoming annual stockholders’ meeting, the company’s president asked you to determine the effect of the FIFO, LIFO, and average inventory valuation methods on the company’s income statement.
Beginning inventory, January 1, was 10,000 units at $5 each. Purchases during the year consisted of 15,000 at $6 on April 15, 20,000 units at $7 on July 19, and 25,000 units at $8 on November 2.
If the ending inventory on December 31 was 40,000, calculate the value of this inventory by using the three valuation methods.
FIFO: LIFO: Average Cost:
Calculate the income statement items below for each of the inventory valuation methods.
| Net sales | 30,000 units at $12 each |
| Operating expenses | $100,000 |
| Income tax rate | 30% |
| Pan American Industries, Inc. | |||
| FIFO | LIFE | Average Cost | |
| Net sales | |||
| Beginning inventory | |||
| Purchases | |||
| Cost of goods available for sale | |||
| Ending inventory | |||
| Cost of goods sold | |||
| Gross profit | |||
| Operating expenses | |||
| Income before taxes | |||
| Income tax | |||
| Net income | |||
Which inventory method should be used if the objective is to pay minor taxes?
Which inventory method should be used if the objective is to show the shareholders the most significant amount of profit in the annual report?