Question

In: Accounting

MusicBiz specializes in sound equipment. Company records indicate the following data for a line of speakers:...

MusicBiz specializes in sound equipment. Company records indicate the following data for a line of speakers: Determine the amounts that MusicBiz should report for cost of goods sold and ending inventory two ways: a. FIFO and b. LIFO.

Date Item Quantity Unit Cost Sale Price

March 1 Balance ....... 16 ......... $ 59   ...........

2 Purchase 4 $ 65

7 Sale 6 $ 114

13 Sale 6 $ 94

a. Under the FIFO method, the cost of goods sold is $ ____ and the ending inventory is $ ____

b. Under the LIFO method, the cost of goods sold is $ _____ and the ending inventory is $____

Requirement 2. MusicBiz uses the FIFO method. Prepare the company's income statement for the month ended March 31, 2018, reporting gross profit. Operating expenses totaled $260, and the income tax rate was 40%.  

Solutions

Expert Solution

Requirement 1.

a. FIFO:

Cost of goods sold is $708

Ending inventory is $496

Explanation:

Under FIFO method, the goods are sold from the first purchased goods. Therefore, in this case, the March 7 sale of 6 units is made from beginning balance inventory of 16 units with units cost $59. March 13 sale also is made from the same beginning inventory balance as still 10 more units are remaining. Cost of goods sold is ascertained from the original cost of the goods that are sold.


Ending inventory = Cost of goods available for sale - Cost of goods sold = $1,204 - $708 = $496

b. LIFO:

Cost of goods sold is $732.

Ending inventory is $472.

Explanation:
Under LIFO method, the goods are sold from the last purchased goods. Therefore, in this case, the March 7 sale of 6 units is made from last purchased inventory on March 2 for 4 units at $65 unit cost and balance 2 units from the beginning inventory of 16 units with units cost $59. March 13 sale is made from the same beginning inventory balance as still 14 more units are remaining. Cost of goods sold is ascertained from the original cost of the goods that are sold.


Ending inventory = Cost of goods available for sale - Cost of goods sold = $1,204 - $732 = $472

Requirement 2.

Income statement shows the gross profit and net income of the company. Gross profit is ascertained by reducing cost of goods sold (FIFO method) from sales. Net income is ascertained by reducing the operating expenses and income taxes from gross profit.


Sales = Units sold × Selling price per unit

March 7 sales = 6 × $114 = $684
March 13 sales = 6 × $94 = 564

Total sales = $684 + $564 = $1,248

Cost of goods sold under FIFO = $708

Income tax = 40% of Income before taxes = $280 × 40% = $112


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