Question

The Brick Company had cash sales of $227,900 for Year 1, its first year of operation. On April 2, the company purchased 214 units of inventory at $225 per unit. On September 1, an additional 161 units were purchased for $248 per unit. The company had 66 units on hand at the end of the year. The company’s income tax rate is 40 percent. All transactions are cash transactions.
a. The preceding paragraph describes five accounting events: (1) a sales transaction, (2) the first purchase of inventory, (3) a second purchase of inventory, (4) the recognition of cost of goods sold expense, and (5) the payment of income tax expense. Show the amounts of each event in horizontal statements models like the following ones, assuming first a FIFO and then a LIFO cost flow.
b. Compute net income using FIFO.
c. Compute net income using LIFO.
e. Which method, FIFO or LIFO, produced the larger amount of assets on the balance sheet

Answer 1

Req.1

THE BRICK COMPANY
Effect of Events on Financial Statements
Panel 1: FIFO Cost Flow
Event No.	Balance Sheet					Income Statement					Cash Flows
	Cash	+	Inventory	=	Retained Earnings	Revenue	-	Expenses	=	Net income
1	227,900	+		=	227,900	227,900	-		=	227,900	227,900	OA
2	-48,150	+	48,150	=			-		=		-48,150	OA
3	-39,928	+	39,928	=			-		=		-39,928	OA
4		+	-71,710	=	-71,710		-	71,710	=	-71,710	0	NA
5	-62476	+		=	-62476		-	62476	=	-62476	-62476	OA
Bal.	77,346	+	16,368	=	93,714	227,990	-	134,186	=	93,714	77,346	NC
Panel 2: LIFO Cost Flow
1	227,900	+		=	227,900	227,900	-		=	227,900	227,900	OA
2	-48,150	+	48,150	=			-		=		-48,150	OA
3	-39,928	+	39,928	=			-		=		-39,928	OA
4		+	-73,228	=	-73,228		-	73,228	=	-73,228	0	NA
5	-61,869	+		=	-61,869		-	61,869	=	-61,869	-61,869	OA
Bal.	77,953	+	14,850	=	92,803	227,900	-	135097	=	92,803	77,953	NC

Working:

1) First Purchase : April 2:( 214 Unit *$225)= $ 48,150

2) Second Purchase : Sep.1( 161 Units * $ 248)= $ 39,928

3) Sales Units: 214 + 161 - 66= 309 Units

4) Cost of Good Sold:

FIFO ( 214 * $225)+ ( 95 * $248)	$71,710
LIFO ( 161 * $248) + ( 148 *$ 225)	$73,228

Req ( B)

. Net income assuming FIFO

Sales revenue	227,900
Cost of goods sold	71,710
Gross profit	156,190
Income tax expense (40% x $156190)	62476
Net income	93,714

Req ( C)

Net income assuming LIFO

Sales revenue	227,900
Cost of goods sold	73,228
Gross profit	154,672
Income tax expense (40% x $154,672)	61,869
Net income	92,803

Req ( e). FIFO method produced the larger amount of assets on the balance sheet.