Question

ABC Inc. had two accountants named Ms. Lee and Mr. Wong who created two different sets of income statements, cash flow statements, and balance sheets to give to the Accounting Manager of ABC Inc. Ms. Lee believed that the FIFO method was the best way of costing inventory and believed that packaging the screwdrivers is integral to selling them. Mr. Wong believed that the weighted average method is best for inventory costing and that packaging is not really important to sell the screwdrivers. ABC Inc. made the following transactions:

1. Jan 1^st, 2019: ABC Inc. receives 1200 metal plates for which it pays cash of $5 each from Metal Inc. and receives 6000 plastic slabs from Plastic Inc. for which it pays $1 to the supplier in cash.
2. Jan 21^st, 2019: ABC Inc. receives 600 metal plates for which it pays cash of $6 each from Metal Inc. and receives 3000 plastic slabs from Plastic Inc. for which it pays $2 each to the supplier in cash.
3. Jan 28^th, 2019: ABC Inc. produces 25,000 screwdrivers and uses 1,300 metal plates and 7,500 plastic slabs to make those screwdrivers.
4. Jan 30^th, 2019: ABC Inc. spends $5,000 cash on packaging its 25,000 screwdrivers.
5. Jan 31^st, 2019:   ABC Inc. sells 18,000 screwdrivers to Wan Chai Inc. for $10 each. However, Wan Chai Inc. uses a Hong Kong Express credit card, which had fees of 3%, and ABC Inc. receives the money in cash immediately from Hong Kong Express.

A）Prepare both sets of financial statements (Balance sheet, cash flow statement, and income statement) - by Ms. Lee and Mr. Wong (9 points for each financial statement set, 18 points total). Journal entries give partial credit.

B） Which set of financial statements (Ms. Lee or Mr. Wong’s) show that ABC Inc. is able to pay investors back better? Why? (2 points) ）

Answer 1

working
1-Jan	Units	Cost	Total cost
Metal plates	1200	5	6000
Plastic slabs	6000	1	6000	12000
21-Jan
Metal plates	600	6	3600
Plastic slabs	3000	2	6000	9600
		used	Ending Inventory	FIFO cost	Weighted average
Total Metal plates	1800	1300	500	3000	2667
				(500*6)	(6000+3600)/1800*500
Total Plastic slabs	9000	7500	1500	3000	2000
			Total	(1500*2)	(6000+6000)/9000*1500
		FIFO		6000	4667
Cost of good sold
Metal plates (1200*5)+(100*6)		6600
Plastic slabs (6000*1)+(1500*2)		9000
		15600
		weighted average
Metal plates
(6000+3600)/1800*1300		6933
Plastic slabs
(6000+6000)/9000*7500		10000
		16933
ans 1 FIFO
Income statement
Sales (18000*10)	180000
Less: cost of good sold	15600
Gross profit	164400
Less: Packaging cost	5000
Less: credit card expenses	5400
Net Income	154000
Balance Sheet
Cash (180000*97%)-5000	169600
Inventory	6000
Total assets	175600
Accounts payable (12000+9600)	21600
Retained Earnings	154000
Total liabilities & stockholder equity	175600
Cash flow statement
Cash flow from operating activities
Collection from sales	174600
Paid pakaging expenses	-5000
Ending balance of cash	169600
weighted average
Income statement
Sales (18000*10)	180000
Less: cost of good sold	16933
Gross profit	163067
Less: Packaging cost	5000
Less: credit card expenses	5400
Net Income	152667
Balance Sheet
Cash (180000*97%)-5000	169600
Inventory	4667
Total assets	174267
Accounts payable (12000+9600)	21600
Retained Earnings	152667
Total liabilities & stockholder equity	174267
Cash flow statement
Cash flow from operating activities
Collection from sales	174600
Paid pakaging expenses	-5000
Ending balance of cash	169600
ans 2
FIFO method shows that the investors will be paid better as the net income is greater
than weighted average cost.
When the prices are rising FIFO method gives best results. As the inventory purchased first is used first.
If any doubt please comment