CASE #2: Sarah Perreault Corp. sold 6,400 units of its product at $45 per unit in year 2013 and incurred operating expenses of $6 per unit

CASE #2: Sarah Perreault Corp. sold 6,400 units of its product at $45 per unit in year 2013 and incurred operating expenses of $6 per unit in selling them.  It began the year with 600 units in inventory and the following transactions took place during the fiscal year:

DATEACTIVITYUNITSPRICE

Jan 1    Beginning inventory600$18 per unit

Feb 20Purchase1,500$19 per unit

May 16Purchase700$20 per unit

Oct 3Purchase400$21 per unit

Dec 11Purchase3,300$22 per unit

Feb 22Sale750$45 per unit

May 15Sale890$45 per unit

Sep 11Sale775$45 per unit

Dec 28Sale3,985$45 per unit

Problem #1  Prepare comparative income statements similar to the ones found in your text at Exhibit 6.8 for the three inventory cost flow methods of FIFO, LIFO and weighted average.  The company uses a perpetual inventory system and its income tax rate is 30%.

In calculating cost of sales, be sure to demonstrate the flow of inventory during the year and prove your ending inventory amount by using the inventory cost formula (BI + Purchases =  GA – EI = CGS).

Problem #2  Discuss in 500 words or less how the financial results from using the three alternative methods would change if Sarah Perreault had been experiencing declining costs in its purchases of inventory?

Problem #3  What advantages and disadvantages are offered by using LIFO and FIFO?  Assume the continuing trend of increasing costs.