Problem 5-19A Effect of differ
Problem 5-19A Effect of different inventory cost flowmethods on financial statement.
The acounting records of Wall’s China Shop reflected thefollowing balances as of January 1, Year 2:
CHECK FIGURES Cost of Goods Sold FIFO: $62,650; Net Income LIFO:$22,012
Cash $80,300
Beginning inventory $33,000 (220 units @ $150)
Common stock $50,000
Retained earmings $63,100
QUESTIONS: The following five transactionsoccurred in Year 2.
1.) First purchase (cash: 150 units @$155
2.) Second purchase (cash): 160 [email protected] $160
3.) Sales (all cash): 410 units @$320
4.) Paid $38,000 cash for salaries expense
5.) Paid cash for income tax at the rate of 25 percent of incomebefore taxes
Required
a. Compute the cost of goods sold and ending inventory,assuming(1) FIFO cost flow (2) LIFO cost flow and (3) weighted average costflow. Compute the income tax expense for each method
b. Record the five transactions in general journal form and postto T-accounts assuming (1) FIFO cost flow (2) LIFO cost flow and(3) weighted-average cost flow
c. Use a vertical model to show the Year 2 income statement,balance sheet, and statement of cash flows under FIFO, LIFO, andweighted-average. (Hint: Record the events under anaccounting equation before preparing the statements.)
Answer:
| a | Under FIFO goods purchasedfirst are sold first. Therefore, cost of goods sold and endinginventory would be as follows: | ||||||||||
| FIFO | Purchases | Cost of Goods sold | Ending Inventory | ||||||||
| Date | Quantity | Unit Cost | Total cost (Quantity*Unit cost) | Quantity | Unit Cost | Total cost (Quantity*Unit cost) | Quantity | Unit Cost | Total cost | ||
| Beginning Inventory | 220 | 150 | $ 33,000 | ||||||||
| First Purchase | 150 | $ 155 | $ 23,250 | ||||||||
| Second Purchase | 160 | $ 160 | $ 25,600 | ||||||||
| Sale | 220 | $ 150 | $ 33,000 | $ 120 | $ 160 | $ 19,200 | (120*$160) | ||||
| 150 | $ 155 | $ 23,250 | |||||||||
| 40 | $ 160 | $ 6,400 | |||||||||
| Total | $ 81,850 | (410-220-150) | $ 62,650 | $ 19,200 | |||||||
| Cost of goods sold | $ 62,650 | ||||||||||
| Ending Inventory | $ 19,200 | (120*$160) | |||||||||
| b | LIFO | ||||||||||
| Under LIFO goods purchased last are sold first.Therefore, cost of goods sold and ending inventory would be asfollows: | |||||||||||
| Purchases | Cost of Goods sold | Ending Inventory | |||||||||
| Date | Quantity | Unit Cost | Total cost (Quantity*Unit cost) | Quantity | Unit Cost | Total cost (Quantity*Unit cost) | Quantity | Unit Cost | Total cost | ||
| Beginning Inventory | 220 | 150 | $ 33,000 | ||||||||
| First Purchase | 150 | $ 155 | $ 23,250 | ||||||||
| Second Purchase | 160 | $ 160 | $ 25,600 | ||||||||
| Sale | 160 | $ 160 | $ 25,600 | $ 120 | $ 150 | $ 18,000 | (120*$150) | ||||
| 150 | $ 155 | $ 23,250 | |||||||||
| 100 | $ 150 | $ 15,000 | |||||||||
| Total | $ 81,850 | (410-160-150) | $ 63,850 | $ 18,000 | |||||||
| Cost of goods sold | $ 63,850 | ||||||||||
| Ending Inventory | $ 18,000 | (120*$150) | |||||||||
| c | Average cost method | ||||||||||
| Under this method weighted average of cost istaken. Therefore, cost of goods sold and ending inventory would beas follows: | |||||||||||
| Purchases | Cost of Goods sold | Ending Inventory | |||||||||
| Date | Quantity | Unit Cost | Total cost (Quantity*Unit cost) | Quantity | Unit Cost | Total cost (Quantity*Unit cost) | Quantity | Unit Cost | Total cost | ||
| Beginning Inventory | 220 | 150 | $ 33,000 | ||||||||
| First Purchase | 150 | $ 155 | $ 23,250 | ||||||||
| Second Purchase | 160 | $ 160 | $ 25,600 | 530 | $ 154 | $ 81,850 | |||||
| (220+150+160) | (81850/530) | (33,000+23,250+25,600) | |||||||||
| Sale | 410 | $ 154 | 63,318 | $ 120 | $ 154 | $ 18,532 | (120*$154) | ||||
| Total | $ 81,850 | (410-160-150) | $ 63,318 | $ 18,532 | |||||||
| Cost of goods sold | $ 63,318 | ||||||||||
| Ending Inventory | $ 18,532 | (120*$154) | |||||||||
| Requirement 2 | Income Statement, Balance Sheet and Cash flow fromoperation under | ||||||||||
| a | FIFO method | ||||||||||
| Income Statement | |||||||||||
| Sales | $ 1,31,200 | (410 units*$320) | |||||||||
| Less:Cost of goods sold | $ 62,650 | ||||||||||
| Gross Profit | $ 68,550 | (131,200-62650) | |||||||||
| Less: Salaries expenses | $ 38,000 | ||||||||||
| Profit before tax | $ 30,550 | (68,550-30,550) | |||||||||
| Less: Tax expenses | $ 7,638 | (30,550*25%) | |||||||||
| Profit after tax | $ 22,912 | (30,550-7638) | |||||||||
| Balance Sheet | |||||||||||
| Asset | |||||||||||
| Cash | $ 1,16,813 | (80100+131,200-23,250-25600-38000-7,637.5) | |||||||||
| Ending Inventory | $ 19,200 | ||||||||||
| Total | $ 1,36,013 | ||||||||||
| Liabilities and Stockholder’s Equity | |||||||||||
| Common Stock | $ 50,000 | ||||||||||
| Retained Earning | $ 86,012 | (63100+22913) | |||||||||
| Total | $ 1,36,012 | ||||||||||
| Statement of Cash flow | |||||||||||
| Cashflow from operating activity | |||||||||||
| Cash received from operation | |||||||||||
| Cash collected from customers | $ 1,31,200 | ||||||||||
| Cash paid | |||||||||||
| Less: Cash paid to creditors | $ 48,850 | ||||||||||
| Salaries expenses | $ 38,000 | ||||||||||
| Income tax expenses | $ 7,638 | $ 94,488 | |||||||||
| Cash inflow from operation | $ 36,713 | (131,200-94,488) | |||||||||
| b | LIFO | ||||||||||
| Income Statement | |||||||||||
| Sales | $ 1,31,200 | (410 units*$320) | |||||||||
| Less:Cost of goods sold | $ 63,850 | ||||||||||
| Gross Profit | $ 67,350 | (131,200-63,850) | |||||||||
| Less: Salaries expenses | $ 38,000 | ||||||||||
| Profit before tax | $ 29,350 | (67,350-38,000) | |||||||||
| Less: Tax expenses | $ 7,338 | (29,350*25%) | |||||||||
| Profit after tax | $ 22,012 | (29,350-7,338) | |||||||||
| Balance Sheet | |||||||||||
| Asset | |||||||||||
| Cash | $ 1,17,113 | (80100+131,200-23,250-25600-38000-7,337.50) | |||||||||
| Ending Inventory | $ 18,000 | ||||||||||
| Total | $ 1,35,113 | ||||||||||
| Liabilities and Stockholder’s Equity | |||||||||||
| Common Stock | $ 50,000 | ||||||||||
| Retained Earning | $ 85,112 | (63100+22013) | |||||||||
| Total | $ 1,35,112 | ||||||||||
| Statement of Cash flow | |||||||||||
| Cashflow from operating activity | |||||||||||
| Cash received from operation | |||||||||||
| Cash collected from customers | $ 1,31,200 | ||||||||||
| Cash paid | |||||||||||
| Less: Cash paid to creditors | $ 48,850 | ||||||||||
| Salaries expenses | $ 38,000 | ||||||||||
| Income tax expenses | $ 7,338 | $ 94,188 | |||||||||
| Cash inflow from operation | $ 37,013 | (131,200-94,188) | |||||||||
| c | Weighted Average | ||||||||||
| Income Statement | |||||||||||
| Sales | $ 1,31,200 | (410 units*$320) | |||||||||
| Less:Cost of goods sold | $ 63,318 | ||||||||||
| Gross Profit | $ 67,882 | (131,200-63,318) | |||||||||
| Less: Salaries expenses | $ 38,000 | ||||||||||
| Profit before tax | $ 29,882 | (67,882-38,000) | |||||||||
| Less: Tax expenses | $ 7,471 | (29,882*25%) | |||||||||
| Profit after tax | $ 22,411 | (29,882-7,471) | |||||||||
| Balance Sheet | |||||||||||
| Asset | |||||||||||
| Cash | $ 1,16,979 | (80100+131,200-23,250-25600-38000-7,471) | |||||||||
| Ending Inventory | $ 18,532 | ||||||||||
| Total | $ 1,35,512 | ||||||||||
| Liabilities and Stockholder’s Equity | |||||||||||
| Common Stock | $ 50,000 | ||||||||||
| Retained Earning | $ 85,511 | (63100+22412) | |||||||||
| Total | $ 1,35,511 | ||||||||||
| Statement of Cash flow | |||||||||||
| Cashflow from operating activity | |||||||||||
| Cash received from operation | |||||||||||
| Cash collected from customers | $ 1,31,200 | ||||||||||
| Cash paid | |||||||||||
| Less: Cash paid to creditors | $ 48,850 | ||||||||||
| Salaries expenses | $ 38,000 | ||||||||||
| Income tax expenses | $ 7,471 | $ 94,321 | |||||||||
| Cash inflow from operation | $ 36,879 | (131,200-94,321) | |||||||||
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