Response to the following problem:
Part A
Cochrane Corporation began operating on January 2, 2016. The following table shows the valuation of its inventory, using three different inventory valuation methods:
| |
|
Spec. ident. |
Wtd. avg. |
FIFO |
|
Dec. 31,
|
2016
|
$ 9,200
|
$ 9,400
|
$ 9,600
|
|
Dec. 31,
|
2017
|
9,100
|
9,000
|
8,800
|
|
Dec 31,
|
2018
|
10,300
|
11,000
|
12,000
|
Assume sales were $100,000 each year, inventory purchases were $80,000 each year, and there were no other expenses. The company uses the periodic inventory system.
Required:
1. Which inventory method shows the highest net income for 2016?
2. Are average costs for each unit of inventory rising or falling in 2016?
3. Which inventory method shows the highest net income for 2017?
4. Are average costs for each unit of inventory rising or falling in 2017?
5. What conclusions can be drawn from the answers to questions 1 to 4?
Part B
In 2019, the company sold its entire inventory. As in the three prior years, 2019 sales were $100,000, inventory purchases were $80,000 and there were no other expenses.
Required:
6. Calculate net income for 2019 for the three cost flow assumptions.
7. Calculate total net incomes for each method over the four years. Which cost flow assumption produces the highest net income total for the four years? Why?