Kowalski Company began operations in 2007 by selling a single product. Data on purchases and sales…


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Kowalski Company began operations in 2007 by selling a single product. Data on purchases and sales for the year were as follows: Purchases: Date Units Purchased Unit Cost Total Cost April 6 3,875 $12.20 $ 47,275 May 18 4,125 13.00 53,625 June 6 5,000 13.20 66,000 July 10 5,000 14.00 70,000 August 10 3,400 14.25 48,450 October 25 1,600 14.50 23,200 November 4 1,000 14.95 14,950 December 10 1,000 16.00 16,000 25,000 $339,500 Sales: April 2,000 units May 2,000 June 2,500 July 3,000 August 3,500 September 3,500 October 2,250 November 1,250 December 1,000 Total units Total sales 21,000 $325,000 On January 6, 2008, the president of the company, Jolly Zondra, asked for your advice on costing the 4,000-unit physical inventory that was taken on December 31, 2007. Moreover, since the firm plans to expand its product line, she asked for your advice on the use of a perpetual inventory system in the future. 1. Determine the cost of the December 31, 2007, inventory under the periodic system, using the (a) first-in, first-out method, (b) last-in, first-out method, and (c) average cost method. 2. Determine the gross profit for the year under each of the three methods in (1). 3. a. Explain varying viewpoints why each of the three inventory costing methods may best reflect the results of operations for 2007. b. Which of the three inventory costing methods may best reflect the replacement cost of the inventory on the balance sheet as of December 31, 2007? c. Which inventory costing method would you choose to use for income tax purposes? Why? d. Discuss the advantages and disadvantages of using a perpetual inventory system. From the data presented in this case, is there any indication of the adequacy of inventory levels during the year?

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