Reference no: EM13932854
The following information pertains to the inventory of the Windjammer Company:
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During the year, Windjammer sold 3,500 units of inventory at $50 per unit and incurred $21,000 of operating expenses. Windjammer currently uses the FIFO method but is considering a change to LIFO. All transactions are cash transactions. Assume a 30 percent income tax rate. Windjammer started the period with cash of $36,000, inventory of $7,500, common stock of $20,000 and retained earnings of $23,500.
Required:
a. Record the above transactions in general journal form and post to T-accounts using
(1) FIFO
(2) LIFO.
Use a separate set of journal entries and T-accounts for each method.
b. Prepare income statements using FIFO and LIFO.
c. Determine the amount of income tax Windjammer would save if it changed cost flow methods.
d. Determine the cash flow from operating activities under FIFO and LIFO.
e. Explain why cash flow from operating activities is lower under FIFO when that cost flow method produced the higher gross margin.