Question

Crystal apple sales company began 2010 with cash of $2,000, inventory of $3,600 (200 crystal apples that cost $18 each), $2,500 of common stock, and $3,100 of retained earnings. the following events occured during 2010.

1. Crystal Apple purchased additional inventory twice during 2014. The first purchase consisted of 800 apples that cost $20 each, and the second consisted of 1,200 apples that cost $24 each. The purchases were on account.

2. The company sold 2,040 apples for cash at a selling price of $40 each.

3. The company paid $44,800 cash on accounts payable for inventory purchases.

4. Crystal Apple paid $26,000 cash for operating expenses.

5.Assume an income tax rate of 30 percent. Crystal Apple paid income tax expense in cash.

Required:

a. Determine the ending inventory and cost of goods sold using the three different cost flow assumptions: FIFO, LIFO, and Weighted Average.

b. Prepare an income statement, a balance sheet, and a statement of cash flows under each of the three cost flow assumptions.

Answer 1

a) FIFO cost flow Assumption :

Cost of goods sold: Under FIFO method, the goods purchased first are sold first, hence the cost of goods sold will include the cost of beginning inventory and inventory purchase first. (i.e.out of 2,040 apples sold, 200 are of beginning inventory, 800 are purchased at $20 and balance 1,040 (2,040-200-800) are purchased at $24.

Cost of goods sold = (200*$18)+(800*$20)+(1,040*$24)

= $3,600+$16,000+$24,960 = $44,560

Ending Inventory Under FIFO = (1,200-1,040)*$24 = 160*$24 = $3,840

LIFO cost flow Assumption

Cost of goods sold: Under LIFO method, the goods purchased last are sold first, hence the cost of goods sold will include the cost of inventory purchase last and beginning inventory. (i.e.out of 2,040 apples sold, 1,200 are purchased at $24, 800 are purchased at $20 and balance 40 (2,040-1,200-800) are.of beginning inventory

Cost of goods sold = (1,200*$24)+(800*$20)+(40*$18)

= $28,800+$16,000+$720 = $45,520

Ending Inventory Under LIFO = (200-40)*$18 = 160*$18 = $2,880

Weighted Average cost flow Assumption

Calculation of weighted Average cost per apple = Cost of Beginning inventory and purchase/Total apple available

Cost of Beginning inventory and purchases = (200*$18)+(800*$20)+(1,200*$24)

= $3,600+$16,000+$28,800 = $48,400

Total apples available = 200+800+1,200 = 2,200 apples

weighted Average cost per apple = $48,400/2,200 = $22 per apple

Cost of goods sold = 2,040*$22 = $44,880

Ending Inventory = 160*$22 = $3,520

b) FIFO cost flow Assumption

Income Statement (Amount in $)

Sales (2,040*$40)	81,600
Less: Cost of goods sold	(44,560)
Gross Profit	37,040
Less: Operating Expenses	(26,000)
Income before income taxes	11,040
Less: Income tax (30%*$11,280)	(3,312)
Net Income	7,728

  Balance Sheet (Amount in $)

Assets
Cash (opening $2,000+Sales $81,600-Purchases payment $44,800- Operating expenses $26,000-Income tax expenses $3,312)	9,488
Inventory	3,840
Total Assets	13,328
Liabilities and Stockholder's Equity
Common Stock	2,500
Retained Earnings (Opening $3,100+Net Income $7,728)	10,828
Total Liabilities and Equity	13,328

Statement of Cash Flows (Amount in $)

Cash Flow from Operating Activities
Cash Sales	81,600
Payment to Accounts Payable	(44,800)
Operating Expenses	(26,000)
Income tax paid	(3,312)
Net Increase in cash and cash equivalents	7,488
Add: Opening Cash and cash equivalents	2,000
Closing Cash and cash equivalents	9,488

LIFO cost flow Assumption

Income Statement (Amount in $)

Sales (2,040*$40)	81,600
Less: Cost of goods sold	(45,520)
Gross Profit	36,080
Less: Operating Expenses	(26,000)
Income before income taxes	10,080
Less: Income tax (30%*$10,080)	(3,024)
Net Income	7,056

  Balance Sheet (Amount in $)

Assets
Cash (opening $2,000+Sales $81,600-Purchases payment $44,800- Operating expenses $26,000-Income tax expenses $3,024)	9,776
Inventory	2,880
Total Assets	12,656
Liabilities and Stockholder's Equity
Common Stock	2,500
Retained Earnings (Opening $3,100+Net Income $7,056)	10,156
Total Liabilities and Equity	12,656

Statement of Cash Flows (Amount in $)

Cash Flow from Operating Activities
Cash Sales	81,600
Payment to Accounts Payable	(44,800)
Operating Expenses	(26,000)
Income tax paid	(3,024)
Net Increase in cash and cash equivalents	7,776
Add: Opening Cash and cash equivalents	2,000
Closing Cash and cash equivalents	9,776

Weighted Average cost flow Assumption

Income Statement (Amount in $)

Sales (2,040*$40)	81,600
Less: Cost of goods sold	(44,880)
Gross Profit	36,720
Less: Operating Expenses	(26,000)
Income before income taxes	10,720
Less: Income tax (30%*$10,720)	(3,216)
Net Income	7,504

  Balance Sheet (Amount in $)

Assets
Cash (opening $2,000+Sales $81,600-Purchases payment $44,800- Operating expenses $26,000-Income tax expenses $3,216)	9,584
Inventory	3,520
Total Assets	13,104
Liabilities and Stockholder's Equity
Common Stock	2,500
Retained Earnings (Opening $3,100+Net Income $7,504)	10,604
Total Liabilities and Equity	13,104

Statement of Cash Flows (Amount in $)

Cash Flow from Operating Activities
Cash Sales	81,600
Payment to Accounts Payable	(44,800)
Operating Expenses	(26,000)
Income tax paid	(3,216)
Net Increase in cash and cash equivalents	7,584
Add: Opening Cash and cash equivalents	2,000
Closing Cash and cash equivalents	9,584