Effects of Inventory Costing Methods

Refer to the information for Tyler Company above.

Required:

1. Which inventory costing method produces the highest amount for net income?

2. Which inventory costing method produces the lowest amount for taxes?

3. Which inventory costing method produces the highest amount for ending inventory?

4. How would your answers to Requirements 1-3 change if inventory prices declined during the period?

Concept introduction:

Perpetual Inventory System:

The perpetual inventory system records and updates the inventory after each and every transaction. The inventory balance is updated after each transaction and it is kept up to date at every time.

FIFO method:

FIFO Stands for First In First Out. Under this method, the units purchased first are assumed to be sold first and cost of goods sold is calculated accordingly. The ending inventory in the method includes the latest units purchased.

LIFO method:

LIFO Stands for Last in First Out. Under this method, the latest units purchased are assumed to be sold first and cost of goods sold is calculated accordingly. The ending inventory in the method includes the oldest units purchased.

Average method:

Under this method, the cost per unit of the inventory is calculated as weighted average cost per unit and the cost of goods sold and inventory is calculated with the help of weighted average cost per unit.

Requirement 1:

To indicate:

The costing method that produces the highest amount of net income.

The calculations of cost of goods sold and ending inventory under each of the method is as follows:

Concept introduction:

Perpetual Inventory System:

The perpetual inventory system records and updates the inventory after each and every transaction. The inventory balance is updated after each transaction and it is kept up to date at every time.

FIFO method:

FIFO Stands for First In First Out. Under this method, the units purchased first are assumed to be sold first and cost of goods sold is calculated accordingly. The ending inventory in the method includes the latest units purchased.

LIFO method:

LIFO Stands for Last in First Out. Under this method, the latest units purchased are assumed to be sold first and cost of goods sold is calculated accordingly. The ending inventory in the method includes the oldest units purchased.

Average method:

Under this method, the cost per unit of the inventory is calculated as weighted average cost per unit and the cost of goods sold and inventory is calculated with the help of weighted average cost per unit.

Requirement 2:

To indicate:

The costing method that produces the lowest amount for taxes.

Concept introduction:

Perpetual Inventory System:

The perpetual inventory system records and updates the inventory after each and every transaction. The inventory balance is updated after each transaction and it is kept up to date at every time.

FIFO method:

FIFO Stands for First In First Out. Under this method, the units purchased first are assumed to be sold first and cost of goods sold is calculated accordingly. The ending inventory in the method includes the latest units purchased.

LIFO method:

LIFO Stands for Last in First Out. Under this method, the latest units purchased are assumed to be sold first and cost of goods sold is calculated accordingly. The ending inventory in the method includes the oldest units purchased.

Average method:

Under this method, the cost per unit of the inventory is calculated as weighted average cost per unit and the cost of goods sold and inventory is calculated with the help of weighted average cost per unit.

Requirement 3:

To indicate:

The costing method that produces the highest amount of ending inventory.

Concept introduction:

Perpetual Inventory System:

The perpetual inventory system records and updates the inventory after each and every transaction. The inventory balance is updated after each transaction and it is kept up to date at every time.

FIFO method:

FIFO Stands for First In First Out. Under this method, the units purchased first are assumed to be sold first and cost of goods sold is calculated accordingly. The ending inventory in the method includes the latest units purchased.

LIFO method:

LIFO Stands for Last in First Out. Under this method, the latest units purchased are assumed to be sold first and cost of goods sold is calculated accordingly. The ending inventory in the method includes the oldest units purchased.

Average method:

Under this method, the cost per unit of the inventory is calculated as weighted average cost per unit and the cost of goods sold and inventory is calculated with the help of weighted average cost per unit.

Requirement 4:

To indicate:

The change in the answers from above three questions in case of declining prices.