Question

The accounting records of Wall’s China Shop reflected the following balances as of January 1, 2018: Cash $ 17,600 Beginning inventory 18,400 (200 units @ $92) Common stock 14,500 Retained earnings 21,500 The following five transactions occurred in 2018: First purchase (cash) 125 units @ $94 Second purchase (cash) 195 units @ $102 Sales (all cash) 355 units @ $190 Paid $15,700 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.

Answer 1

Calculation of COGS and Ending inventory under FIFO method -

Cosing stock = opening + purchase - sales

= 200 + 320 - 355

= 520 - 355

= 165

under FIFO mehod this 165 units left must be from last lot(second purchase) 195 units, so closing stock value/Ending inventory cost = 165*102 = 16830

COGS = total purchase cost - Ending inventory

= 200*92 + 125*94 + 195*102 - 16830

= 18400 + 11750 + 19890 - 16830

= 50040 - 16830

= 33210

Calculation of COGS and Ending inventory under LIFO method -

Cosing stock = opening + purchase - sales

= 200 + 320 - 355

= 520 - 355

= 165

under LIFO mehod this 165 units left must be from openng stock 200 units, so closing stock value/Ending inventory cost = 165*92 = 15180

COGS = total purchase cost - Ending inventory

= 200*92 + 125*94 + 195*102 - 15180

= 18400 + 11750 + 19890 - 15180

= 50040 - 15180

= 34860

Calculation of COGS and Ending inventory under Weighted average method -

	Under Weighted average method
Date	opening	purchase	COGS	Closing	Ending inventory value	Cost per unit
1/1/2018	200	0	0	200	18400	92
first purchase	200	125	0	325	30150	92.77
second purchase	325	195	0	520	50040	96.23
sales	520	0	355	165	15878	96.23
Total	200	320	355	165

from above table closing stock value/Ending inventory value would be = 15878.

COGS = opening + purchase - closing stock

= 18400 + 31640 - 15878

= 34162

Income statement -

Income statement
		FIFO	LIFO	Weighted average
	Sales	67450	67450	67450
less	COGS	33210	34860	34162
	Gross profit	34240	32590	33288.08
less	overheads:
	salaries	15700	15700	15700
	EBIT	18540	16890	17588.08
less	income tax @ 25%	4635	4222.5	4397.02
	EAT	13905	12667.5	13191.06

Income tax expense has been shown in above computation.

Preparation of Cash flow statement -

	Cash flow statement
		FIFO	LIFO	Weighted average	Remarks
	opening cash	17600	17600	17600	Given in question
add	Cash sales	67450	67450	67450	355 units @ 190
less	Cash purchase	31640	31640	31640	320 units @ 94 & 102
less	salaries paid	15700	15700	15700	given in question
less	income tax paid	4635	4222.5	4397.02	from income statement
	Net cash available	33075	33487.5	33312.98

Preparation of Retained earnings statement -

	Retained earnings statement
		FIFO	LIFO	Weighted average
	opening	21500	21500	21500
add	income during the year	13905	12667.5	13191.06
less	dividend paid	0	0	0
	Total	35405	34167.5	34691.06

preparation of balance sheet -

Balance sheet
	FIFO	LIFO	Weighted average
Liabilities
common stock	14500	14500	14500
retained earnings	35405	34168	34691
Assets
cash	33075	33488	33313
closing stock	16830	15180	15878

Please note all figures are in $.

Please comment in case of any clarification required.