# 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.)

 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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