Question

The accounting records of Wall’s China Shop reflected the following balances as of January 1, Year 2:

Cash	$	19,700
Beginning inventory		17,200		(200 units @ $86)
Common stock		14,200
Retained earnings		22,700

The following five transactions occurred in Year 2:

1. First purchase (cash) 115 units @ $88
2. Second purchase (cash) 195 units @ $96
3. Sales (all cash) 345 units @ $196
4. Paid $14,200 cash for salaries expense
5. Paid cash for income tax at the rate of 25 percent of income before taxes

Required

1. Compute the cost of goods sold and ending inventory, assuming (1) FIFO cost flow, (2) LIFO cost flow, and (3) weighted-average cost flow.
2. Use a vertical model to show the Year 2 income statement, balance sheet, and statement of cash flows under FIFO, LIFO, and weighted average. (Hint: Record the events under an accounting equation before preparing the statements.)

Answer 1

Computation of cost of goods sold and ending inventory:

	Cost of goods sold	Ending inventory
FIFO	$30200 (200*86 + 115*88 + 30*$96)	$15,840 (165*96)
LIFO	$31,850 (195*96 + 115*88 + 35*86)	$14,190 (165*86)
Weighted Average	$31145 345 * (200*86 + 115*88 + 195*96)/200+115+195)	$14,895 (165 * 90.27)
Ending inventory(units) = 200+115+195-345 =165 Weighted average cost per unit =(200*86 + 115*88 + 195*96)/200+115+195) = $90.27 (Rounded off) WALL'S CHINA SHOP Income Statements FIFO LIFO Weighted Average Sales (345 * $196) $67,620 $67,620 $67,620 Cost of goods sold - 30,200 - 31,850 - 31,145 Gross Profit 37420 35770 36475 Salaries expense - 14,200 - 14,200 - 14,200 Income before tax 23220 21570 22275 Income tax expense @ 25% - 5,805 - 5,393 - 5,568 Net income $17415 $16177 $16707