Question

 

Laker Company reported the following January purchases and sales data for its only product.

Date			Activities	Units Acquired at Cost								Units sold at Retail
Jan.	1		Beginning inventory	235	units	@	$	16.00	=	$	3,760
Jan.	10		Sales										185	units	@	$	25.00
Jan.	20		Purchase	180	units	@	$	15.00	=		2,700
Jan.	25		Sales										200	units	@	$	25.00
Jan.	30		Purchase	370	units	@	$	14.50	=		5,365
			Totals	785	units					$	11,825		385	units

The Company uses a perpetual inventory system. For specific identification, ending inventory consists of 400 units, where 370 are from the January 30 purchase, 5 are from the January 20 purchase, and 25 are from beginning inventory.

Required:

1. Complete comparative income statements for the month of January for Laker Company for the four inventory methods. Assume expenses are $2,200, and that the applicable income tax rate is 40%. (Round your Intermediate calculations to 2 decimal places.)

2. Which method yields the highest net income?

LIFO

Weighted average

Specific identification

FIFO

3. Does net income using weighted average fall between that using FIFO and LIFO?

Yes

No

4. If costs were rising instead of falling, which method would yield the highest net income?

LIFO

Specific identification

Weighted average

FIFO

Answer 1

Solution 1:

Specific idendtification:

Cost of goods available for sale = $11,825

Cost of ending inventory = (370*$14.50) + (5*$15) + (25 * $16) = $5,840

Cost of goods sold = $11,825 - $5,840 = $5,985

Computation of ending inventory COGS under Weighted Average Cost
Date	Beginning Inventory			Purchase			Cost of Goods Sold			Ending Inventory
	Qty	Rate	Amount	Qty	Rate	Amount	Qty	Rate	Amount	Qty	Rate	Amount
1-Jan	235	$16.00	$3,760	0	$0.00	$0	0	$0.00	$0	235	$16.00	$3,760
10-Jan	235	$16.00	$3,760	0	$0.00	$0	185	$16.00	$2,960	50	$16.00	$800
20-Jan	50	$16.00	$800	180	$15.00	$2,700	0	$0.00	$0	230	$15.22	$3,500
25-Jan	230	$15.22	$3,500	0	$0.00	$0	200	$15.22	$3,043	30	$15.22	$457
30-Jan	30	$15.22	$457	370	$14.50	$5,365	0	$0.00	$0	400	$14.55	$5,822
Total							385		$6,003	400		$5,822

Computation of ending inventory COGS under FIFO
Date	Beginning Inventory			Purchase			Cost of Goods Sold			Ending Inventory
	Qty	Rate	Amount	Qty	Rate	Amount	Qty	Rate	Amount	Qty	Rate	Amount
1-Jan	235	$16.00	$3,760.00	0	$0.00	$0.00	0	$0.00	$0.00	235	$16.00	$3,760.00
10-Jan	235	$16.00	$3,760.00	0	$0.00	$0.00	185	$16.00	$2,960.00	50	$16.00	$800.00
20-Jan	50	$16.00	$800.00	180	$15.00	$2,700.00	0	$0.00	$0.00	50	$16.00	$800.00
										180	$15.00	$2,700.00
25-Jan	50	$16.00	$800.00	0	$0.00	$0.00	50	$16.00	$800.00	30	$15.00	$450.00
	180	$15.00	$2,700.00				150	$15.00	$2,250.00
30-Jan	30	$15.00	$450.00	370	$14.50	$5,365.00	0	$0.00	$0.00	30	$15.00	$450.00
										370	$14.50	$5,365.00
Total							385		$6,010.00	400		$5,815.00

Computation of ending inventory COGS under LIFO
Date	Beginning Inventory			Purchase			Cost of Goods Sold			Ending Inventory
	Qty	Rate	Amount	Qty	Rate	Amount	Qty	Rate	Amount	Qty	Rate	Amount
1-Jan	235	$16.00	$3,760.00	0	$0.00	$0.00	0	$0.00	$0.00	235	$16.00	$3,760.00
10-Jan	235	$16.00	$3,760.00	0	$0.00	$0.00	185	$16.00	$2,960.00	50	$16.00	$800.00
20-Jan	50	$16.00	$800.00	180	$15.00	$2,700.00	0	$0.00	$0.00	50	$16.00	$800.00
										180	$15.00	$2,700.00
25-Jan	50	$16.00	$800.00	0	$0.00	$0.00	180	$15.00	$2,700.00	30	$16.00	$480.00
	180	$15.00	$2,700.00				20	$16.00	$320.00
30-Jan	30	$16.00	$480.00	370	$14.50	$5,365.00	0	$0.00	$0.00	30	$16.00	$480.00
										370	$14.50	$5,365.00
Total							385		$5,980.00	400		$5,845.00

Income Statement - Laker Company
Particulars	Specific Identification	Weighted Average	FIFO	LIFO
Sales	$9,625	$9,625	$9,625	$9,625
Cost of goods sold	$5,985	$6,003	$6,010	$5,980
Gross Profit (Sales - COGS)	$3,640	$3,622	$3,615	$3,645
Expenses	$2,200	$2,200	$2,200	$2,200
Income before income taxes	$1,440	$1,422	$1,415	$1,445
Income tax expense (40%)	$576	$569	$566	$578
Net Income	$864	$853	$849	$867

Solution 2:

LIFO method yield the highest net income.

Solution 3:

Yes, net income using weighted average fall between that using FIFO and LIFO

Solution 4:

If costs were rising instead of falling than FIFO method would yield the highest net income