Question

Problem 5-19A Effect of different inventory cost flow methods on financial statement.

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

CHECK FIGURES Cost of Goods Sold FIFO: $62,650; Net Income LIFO: $22,012

Cash $80,300

Beginning inventory $33,000 (220 units @ $150)

Common stock $50,000

Retained earmings $63,100

QUESTIONS: The following five transactions occurred in Year 2.

1.) First purchase (cash: 150 units @$155

2.) Second purchase (cash): 160 units@ $160

3.) Sales (all cash): 410 units @$320

4.) Paid $38,000 cash for salaries expense

5.) Paid cash for income tax at the rate of 25 percent of income before taxes

Required

a. Compute the cost of goods sold and ending inventory,assuming (1) FIFO cost flow (2) LIFO cost flow and (3) weighted average cost flow. Compute the income tax expense for each method

b. Record the five transactions in general journal form and post to T-accounts assuming (1) FIFO cost flow (2) LIFO cost flow and (3) weighted-average cost flow

c. 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

a	Under FIFO goods purchased first are sold first. Therefore, cost of goods sold and ending inventory would be as follows:
	FIFO	Purchases			Cost of Goods sold			Ending Inventory
	Date	Quantity	Unit Cost	Total cost (Quantity*Unit cost)	Quantity	Unit Cost	Total cost (Quantity*Unit cost)	Quantity	Unit Cost	Total cost
	Beginning Inventory	220	150	$                   33,000
	First Purchase	150	$                         155	$                   23,250
	Second Purchase	160	$                         160	$                   25,600
	Sale				220	$                         150	$                   33,000	$                         120	$                         160	$                   19,200	(120*$160)
					150	$                         155	$                   23,250
					40	$                         160	$                      6,400
	Total			$                   81,850	(410-220-150)		$                   62,650			$                   19,200
	Cost of goods sold	$                     62,650
	Ending Inventory	$                     19,200	(120*$160)
b	LIFO
	Under LIFO goods purchased last are sold first. Therefore, cost of goods sold and ending inventory would be as follows:
		Purchases			Cost of Goods sold			Ending Inventory
	Date	Quantity	Unit Cost	Total cost (Quantity*Unit cost)	Quantity	Unit Cost	Total cost (Quantity*Unit cost)	Quantity	Unit Cost	Total cost
	Beginning Inventory	220	150	$                   33,000
	First Purchase	150	$                         155	$                   23,250
	Second Purchase	160	$                         160	$                   25,600
	Sale				160	$                         160	$                   25,600	$                         120	$                         150	$                   18,000	(120*$150)
					150	$                         155	$                   23,250
					100	$                         150	$                   15,000
	Total			$                   81,850	(410-160-150)		$                   63,850			$                   18,000
	Cost of goods sold	$                     63,850
	Ending Inventory	$                     18,000	(120*$150)
c	Average cost method
	Under this method weighted average of cost is taken. Therefore, cost of goods sold and ending inventory would be as follows:
		Purchases			Cost of Goods sold			Ending Inventory
	Date	Quantity	Unit Cost	Total cost (Quantity*Unit cost)	Quantity	Unit Cost	Total cost (Quantity*Unit cost)	Quantity	Unit Cost	Total cost
	Beginning Inventory	220	150	$                   33,000
	First Purchase	150	$                         155	$                   23,250
	Second Purchase	160	$                         160	$                   25,600				530	$                         154	$                   81,850
								(220+150+160)	(81850/530)	(33,000+23,250+25,600)
	Sale				410	$                         154	63,318	$                         120	$                         154	$                   18,532	(120*$154)
	Total			$                   81,850	(410-160-150)		$                   63,318			$                   18,532
	Cost of goods sold	$                     63,318
	Ending Inventory	$                     18,532	(120*$154)
Requirement 2	Income Statement, Balance Sheet and Cash flow from operation under
a	FIFO method
	Income Statement
	Sales	$                  1,31,200	(410 units*$320)
	Less:Cost of goods sold	$                     62,650
	Gross Profit	$                     68,550	(131,200-62650)
	Less: Salaries expenses	$                     38,000
	Profit before tax	$                     30,550	(68,550-30,550)
	Less: Tax expenses	$                       7,638	(30,550*25%)
	Profit after tax	$                     22,912	(30,550-7638)
	Balance Sheet
	Asset
	Cash	$                  1,16,813	(80100+131,200-23,250-25600-38000-7,637.5)
	Ending Inventory	$                     19,200
	Total	$                  1,36,013
	Liabilities and Stockholder's Equity
	Common Stock	$                     50,000
	Retained Earning	$                     86,012	(63100+22913)
	Total	$                  1,36,012
	Statement of Cash flow
	Cashflow from operating activity
	Cash received from operation
	Cash collected from customers		$                1,31,200
	Cash paid
	Less: Cash paid to creditors	$                     48,850
	Salaries expenses	$                     38,000
	Income tax expenses	$                       7,638	$                   94,488
	Cash inflow from operation		$                   36,713	(131,200-94,488)
b	LIFO
	Income Statement
	Sales	$                  1,31,200	(410 units*$320)
	Less:Cost of goods sold	$                     63,850
	Gross Profit	$                     67,350	(131,200-63,850)
	Less: Salaries expenses	$                     38,000
	Profit before tax	$                     29,350	(67,350-38,000)
	Less: Tax expenses	$                       7,338	(29,350*25%)
	Profit after tax	$                     22,012	(29,350-7,338)
	Balance Sheet
	Asset
	Cash	$                  1,17,113	(80100+131,200-23,250-25600-38000-7,337.50)
	Ending Inventory	$                     18,000
	Total	$                  1,35,113
	Liabilities and Stockholder's Equity
	Common Stock	$                     50,000
	Retained Earning	$                     85,112	(63100+22013)
	Total	$                  1,35,112
	Statement of Cash flow
	Cashflow from operating activity
	Cash received from operation
	Cash collected from customers		$                1,31,200
	Cash paid
	Less: Cash paid to creditors	$                     48,850
	Salaries expenses	$                     38,000
	Income tax expenses	$                       7,338	$                   94,188
	Cash inflow from operation		$                   37,013	(131,200-94,188)
c	Weighted Average
	Income Statement
	Sales	$                  1,31,200	(410 units*$320)
	Less:Cost of goods sold	$                     63,318
	Gross Profit	$                     67,882	(131,200-63,318)
	Less: Salaries expenses	$                     38,000
	Profit before tax	$                     29,882	(67,882-38,000)
	Less: Tax expenses	$                       7,471	(29,882*25%)
	Profit after tax	$                     22,411	(29,882-7,471)
	Balance Sheet
	Asset
	Cash	$                  1,16,979	(80100+131,200-23,250-25600-38000-7,471)
	Ending Inventory	$                     18,532
	Total	$                  1,35,512
	Liabilities and Stockholder's Equity
	Common Stock	$                     50,000
	Retained Earning	$                     85,511	(63100+22412)
	Total	$                  1,35,511
	Statement of Cash flow
	Cashflow from operating activity
	Cash received from operation
	Cash collected from customers		$                1,31,200
	Cash paid
	Less: Cash paid to creditors	$                     48,850
	Salaries expenses	$                     38,000
	Income tax expenses	$                       7,471	$                   94,321
	Cash inflow from operation		$                   36,879	(131,200-94,321)