Question

The accounting records of Steve's China shop reflected the following balances as of January 1, Year XXX1.
Cash			$18,100
Beginning inventory			$18,800	(200 units @ $94)
Common stock			$15,200
Retained earnings			$21,700
The following five transactions occurred in the year XXX1.
1	On March 1st, Steve purchased 120 units @ a unit price of $96. It was a cash purchase.
2	On May 15th, Steve purchased 195 units @ $104. Payment was made in cash for the purchase.
3	On September 18th, Steve sold 350 units @ $189 per unit for cash.
4	On 15th December, $15,350 was paid in cash to employees for salaries expense.
5	On December 31st, Steve paid income tax @ 25% income tax rate by cash.
For convenience, assumethat the company had no other revenue or expense other than what was given above.
Required: a) Compute the cost of goods sold and the cost of ending inventory using (i) FIFO cost flow, (ii) LIFO cost flow and (iii) weighted average cost flow (7.5 points). b) Compute the income tax expense under (i) FIFO cost flow, (ii) LIFO cost flow and (iii) weighted average cost flow (4.5 points).

Answer 1

	Units in ending inventory:
			Units
	Beg inventory		200
	Add:Purchases
	Mar 1.		120
	May 15.		195
			515
	Less: Units sold		350
	Units in ending inventory		165
a)
(i)	FIFO cost flow:
	It is assumed that goods purchased first are sold first
	Cost of goods sold:
	350 units sold as follows:
					$
	From Beg inventory		200 units at $ 94		18800
	From Mar 1. purchase		120 units at $ 96		11520
	From May 15. purchase		30 units at $ 104		3120
			(350-200-120)
	Total				33440
	Cost of ending inventory:
					$
	From May 15. purchase		165 units at $ 104		17160
(ii)	LIFO cost flow:
	It is assumed that goods purchased last are sold first
	Cost of goods sold:
	350 units sold as follows:
					$
	From May 15. purchase		195 units at $ 104		20280
	From Mar 1. purchase		120 units at $ 96		11520
	From Beg inventory		35 units at $ 94		3290
			(350-195-120)
	Total				35090
	Cost of ending inventory:
					$
	From Beg inventory		165 units at $ 94		15510
(iii)	Weighted average cost flow:
	Goods are valued at weighted average cost per unit
	Weighted average cost per unit=Cost of goods available for sale/Units available for sale
			Unit	Rate	Cost
			a	b	a*b
	Beg inventory		200	94	18800
	Mar 1. purchase		120	96	11520
	May 15. purchase		195	104	20280
	Total		515		50600
	Weighted average cost per unit=50600/515=$ 98.25
	Cost of goods sold=Units sold*Weighted average cost per unit=350*98.25=34387.5=$ 34388
	Cost of ending inventory=Units in ending inventory*Weighted average cost per unit=165*98.25=$ 16211