The purchase schedule for Lumbermans and Associates is as follows: Date Items Purchased Cost per Item March 15 6,000 $1.30 July 30 9,000 1.50 December 17 7,000 1.60 Total 22,000 The inventory balance...

The purchase schedule for Lumbermans and Associates is as follows:

The inventory balance as of the beginning of the year was $15,000 (15,000 units at $1), and an inventory count at year-end indicated that 11,000 items were on hand. Sales and operating expenses (excluding cost of goods sold) totaled $55,000 and $15,000, respectively. The federal income tax is 30 percent of taxable income.

INSTRUCTIONS:

1. Prepare three income statements, one under each of the assumptions: FIFO, average, and LIFO.


2. How many tax dollars would be saved by using LIFO instead of FIFO?


3. Assume that the market value of an inventory item dropped to $1.35 as of year-end. Apply the lower-of-cost-or market (net realizable value) rule, and provide the appropriate journal entry (if necessary) under the FIFO, average, and LIFO assumptions.


4. Repeat (a) above assuming that the costs per item were as follows:

Which of the three assumptions gives rise to the highest net income and ending inventory amounts now? Why?