At the end of January of the current year, the records of Donner Company showed the following for a particular item that sold at $18.20 per unit: Transactions Units Amount Inventory, January 1 590 $1,652 Purchase, January 12 570 Purchase, January 26 170 2,736 1,156 Sale Sale (450) (200) Required: 1a. Assuming the use of a periodic inventory system, compute Cost of Goods Sold under each method of inventory: average cost, FIFO, LIFO, and specific identification. For specific identification, assume that the first sale was selected from the beginning inventory and the second sale was selected from the January 12 purchase. 1b. Assuming the use of a periodic inventory system, prepare a partial income statement under each method of inventory: (a) average cost, (b) FIFO, (c) LIFO, and (d) specific identification. For specific identification, assume that the first sale was selected from the beginning inventory and the second sale was selected from the January 12 purchase. 2a. Between FIFO and LIFO, which method would result in the higher pretax income? 2b. Between FIFO and LIFO, which would result in the higher EPS? 3. Between FIFO and LIFO, which method would result in the lower income tax expense? Assume a 20 percent average tax rate. 4. Between FIFO and LIFO, which method would produce the more favorable cash flow?

Before discussing the topic inventory valuation let’s discuss the meaning of inventory. In accounting, inventory is also known as stock. Inventory means all the finished goods, materials, merchandise that a business holds for the purpose of selling it in…