Q17
Using different cost flow assumption, the Houston Electronics company recognizes
different amount of net income. The following is a condensed comparative income
statement for Houston Electronics company.
HOUSTON ELECTRONICS
Condensed Income Statements
FIFO
LIFO
Average-Cost
Sales revenue
$18,500
$18,500
$18,500
Beginning inventory
1,000
1,000
1,000
Purchases
11,000
11,000
11,000
Cost of goods available for sale
12,000
12,000
12,000
Less: Ending inventory
5,800
5,000
5,400
Cost of goods sold
6,200
7,000
6,600
Gross profit
12,300
11,500
11,900
Operating expenses
9,000
9,000
9,000
Income before income taxes
3,300
2,500
2,900
Income tax expense (30%)
990
750
870
Net income
$ 2,310
$ 1,750
$ 2,030
Which of the following statement is FALSE?
A. In a period of inflation, FIFO produces a higher net income because lower unit costs of
the first units purchased are matched against revenue.
B. In a period of inflation, LIFO produces a lower net income because higher unit costs of
the last goods purchased are matched against revenue.
C. In a period of deflation (prices fall), FIFO produces a higher net income.
D. Regardless of whether prices are rising or falling, average-cost produces net income
between FIFO and LIFO.
Q18
Tiffany Company's management wants to maintain a minimum monthly cash balance of
$15,000. At the beginning of March, the cash balance is $16,500, expected cash receipts for
March are $210,000, and cash disbursements are expected to be $220,000. How much cash,
if any, must Tiffany Company borrow to maintain the desired minimum monthly balance?
A. $7,500
B. $8,500
