Jefferson Enterprises has the following income statement data available for 2013:
Sales Revenue: $828,600
Operating Expenses: 370,400
Interest Expense: 42,100
Income Tax Rate: 34%
Jefferson uses a perpetual inventory accounting system and the average cost method. Jefferson is considering adopting the FIFO or LIFO method for costing inventory. Jefferson’s accountant prepared the following data:
If Average Cost Used If FIFO Used If LIFO Used
Ending Inventory $65,950 $78,500 $40,100
Cost of Goods Sold 399,050 386,500 424,900
1. Compute income before taxes, income taxes expense, and net income for each of the three inventory costing methods. (Round to the nearest dollar.)
2. Why are the cost of goods sold and ending inventory amounts different for each of the three methods? What do these amounts tell us about the purchase price of inventory during the year?
3. Which method produces the most realistic amount for net income? For inventory? Explain your answer.