Question

The accounting records of Wall’s China Shop reflected the following balances as of January 1, 2018: Cash $ 17,600 Beginning inventory 18,200 (200 units @ $91) Common stock 15,400 Retained earnings 20,400 The following five transactions occurred in 2018: First purchase (cash) 120 units @ $93 Second purchase (cash) 200 units @ $101 Sales (all cash) 350 units @ $199 Paid $16,950 cash for salaries expense Paid cash for income tax at the rate of 25 percent of income before taxes Required 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. Use a vertical model to show the 2018 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

Beginning inventory	200	$91	$18,200
First purchase	120	93	11,160
Second purchase	200	101	20,200
Total purchase units	520		$49,560
Less: Sales units	350		$69,650
Ending inventory	170

	FIFO	LIFO	Weighted average
Cost of goods sold	$32,390 ($18,200+11,160+(30*$101)	$34,090 ($20,200+11,160+(30*$91)	$33,358 (350*$95.308($49,560/520)
Ending inventory	17,170 (170*$101)	15,470 (170*$91)	16,202 (170*$95.308)

WALL'S CHINA SHOP Income Statement
	FIFO	LIFO	Weighted average
Sales	$69,650	$69,650	$69,650
Less: Cost of goods sold	32,390	34,090	33,358
Gross margin	37,260	35,560	36,292
Less: Expenses:
Salaries	16,950	16,950	16,950
Income before tax	20,310	18,610	19,342
Less: Income tax@25%	5,077.5	4,652.5	4,835.5
Income after taxes	$15,232.5	$13,957.5	$14,506.5

WALL'S CHINA SHOP Balance Sheet
	FIFO	LIFO	Weighted average
Assets:
Cash	$33,862.5	$34,287.5	$34,104.5
Inventory	17,170	15,470	16,202
Total assets	$51,032.5	$49,757.5	$50,306.5
Liabilities
Common stock	15,400	15,400	15,400
Retained earnings	35,632.5 ($20,400+15,232.5)	34,357.5 ($20,400+13,957.5)	34,906.5 ($20,400+14,506.5)
Total liabilities and stockholder's equity	$51,032.5	$49,757.5	$50,306.5

Cash balance:

	FIFO	LIFO	Weighted average
Beginning balance	$17,600	$17,600	$17,600
Add: Cash sales	69,650	69,650	69,650
Less: Total purchases (120*$93+200*$101)	(31,360)	(31,360)	(31,360)
Less: Salaries expenses	(16,950)	(16,950)	(16,950)
Less: Income tax expense	(5,077.5)	(4,652.5)	(4,835.5)
Ending balance	$33,862.5	$34,287.5	$34,104.5

WALL'S CHINA SHOP Statement of Cash Flow
	FIFO	LIFO	Weighted average
Cash flow from operating activities:
Cash receipts from customers	69,650	69,650	69,650
Cash paid for purchase of inventories	-31,360	31,360	31,360
Cash paid for salaries to employees	-16,950	16,950	16,950
Cash paid for income tax	-5,077.5	4,652.5	4,835.5
Cash flow from operating activities	$16,262.5	$16,687.5	$16,504.5
Cash flow from investing activities	0	0	0
Cash flow from financing activities	0	0	0
Net increase /decrease in cash	$16,262.5	$16,687.5	$16,504.5
Beginning balance	17,600	17,600	17,600
Ending balance	$33,862.5	$34,287.5	$34,104.5