Question

The following information applies to the questions displayed below.] 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 180 units @ $ 10.50 = $ 1,890 Jan. 10 Sales 140 units @ $ 19.50 Jan. 20 Purchase 110 units @ $ 9.50 = 1,045 Jan. 25 Sales 120 units @ $ 19.50 Jan. 30 Purchase 260 units @ $ 9.00 = 2,340 Totals 550 units $ 5,275 260 units For specific identification, ending inventory consists of 290 units, where 260 are from the January 30 purchase, 5 are from the January 20 purchase, and 25 are from beginning inventory. Required: 1. Prepare comparative income statements for the month of January for Laker Company for the four inventory methods. Assume expenses are $1,650, and that the applicable income tax rate is 40%. 2. Which method yields the highest net income? 3. Does net income using weighted average fall above, between, or below that using FIFO and LIFO? 4. If costs were rising instead of falling, which method would yield the highest net income?.

Answer 1

Solution 1:

Computation of ending inventory COGS under FIFO - Laker Company
Date	Beginning Inventory			Purchase			Cost of Goods Sold			Ending Inventory
	Qty	Rate	Amount	Qty	Rate	Amount	Qty	Rate	Amount	Qty	Rate	Amount
1-Jan	180	$10.50	$1,890.00	0	$0.00	$0.00	0	$0.00	$0.00	180	$10.50	$1,890.00
10-Jan	180	$10.50	$1,890.00	0	$0.00	$0.00	140	$10.50	$1,470.00	40	$10.50	$420.00
20-Jan	40	$10.50	$420.00	110	$9.50	$1,045.00	0	$0.00	$0.00	40	$10.50	$420.00
										110	$9.50	$1,045.00
25-Jan	40	$10.50	$420.00	0	$0.00	$0.00	40	$10.50	$420.00	30	$9.50	$285.00
	110	$9.50	$1,045.00				80	$9.50	$760.00
30-Jan	30	$9.50	$285.00	260	$9.00	$2,340.00	0	$0.00	$0.00	30	$9.50	$285.00
										260	$9.00	$2,340.00
Total							260		$2,650.00	290		$2,625.00

Computation of ending inventory COGS under LIFO - Laker Company
Date	Beginning Inventory			Purchase			Cost of Goods Sold			Ending Inventory
	Qty	Rate	Amount	Qty	Rate	Amount	Qty	Rate	Amount	Qty	Rate	Amount
1-Jan	180	$10.50	$1,890.00	0	$0.00	$0.00	0	$0.00	$0.00	180	$10.50	$1,890.00
10-Jan	180	$10.50	$1,890.00	0	$0.00	$0.00	140	$10.50	$1,470.00	40	$10.50	$420.00
20-Jan	40	$10.50	$420.00	110	$9.50	$1,045.00	0	$0.00	$0.00	40	$10.50	$420.00
										110	$9.50	$1,045.00
25-Jan	40	$10.50	$420.00	0	$0.00	$0.00	110	$9.50	$1,045.00	30	$10.50	$315.00
	110	$9.50	$1,045.00				10	$10.50	$105.00
30-Jan	30	$10.50	$315.00	260	$9.00	$2,340.00	0	$0.00	$0.00	30	$10.50	$315.00
										260	$9.00	$2,340.00
Total							260		$2,620.00	290		$2,655.00

Computation of ending inventory COGS under Weighted Average Cost - Laker Company
Date	Beginning Inventory			Purchase			Cost of Goods Sold			Ending Inventory
	Qty	Rate	Amount	Qty	Rate	Amount	Qty	Rate	Amount	Qty	Rate	Amount
1-Jan	180	$10.50	$1,890	0	$0.00	$0	0	$0.00	$0	180	$10.50	$1,890
10-Jan	180	$10.50	$1,890	0	$0.00	$0	140	$10.50	$1,470	40	$10.50	$420
20-Jan	40	$10.50	$420	110	$9.50	$1,045	0	$0.00	$0	150	$9.77	$1,465
25-Jan	150	$9.77	$1,465	0	$0.00	$0	120	$9.77	$1,172	30	$9.77	$293
25-Mar	30	$9.77	$293	260	$9.00	$2,340	0	$0.00	$0	290	$9.08	$2,633
Total							260		$2,642	290		$2,633

Computation of COGS and ending inventory - Specific identification
Particulars	Cost of goods available for sale			Cost of goods sold			Ending Inventory
	Nos of units	Unit Cost	Cost of goods available for sale	Nos of units sold	Unit Cost	Cost of goods sold	Nos of units in ending inventory	Unit Cost	Ending inventory
Beginning inventory	180	$10.50	$1,890	155	$10.50	$1,627.50	25	$10.50	$262.50
Purchases:
20-Jan	110	$9.50	$1,045	105	$9.50	$997.50	5	$9.50	$47.50
30-Jan	260	$9.00	$2,340	0	$9.00	$0.00	260	$9.00	$2,340.00
Total	550		$5,275	260		$2,625.00	290		$2,650.00

Income Statement - Laker Company
Particulars	Specific identification	Weighted Average	FIFO	LIFO
Sales	$5,070	$5,070	$5,070	$5,070
Cost of goods sold	$2,625	$2,642	$2,650	$2,620
Gross Profit (Sales - COGS)	$2,445	$2,428	$2,420	$2,450
Expenses	$1,650	$1,650	$1,650	$1,650
Income before taxes	$795	$778	$770	$800
Income tax expense (40%)	$318	$311	$308	$320
Net Income	$477	$467	$462	$480

Solution 2:

LIFO methods yield the highest net income.

Solution 3:

Net income using weighted average fall between that using FIFO and LIFO.

Solution 4:

If costs were rising instead of falling "FIFO method yields the highest net income"