Calculating LIFO, FIFO, Income and Cash Flows An acquaintance has proposed the following business plan to you. A local company requires a consistent quantity of a commodity and is looking for a reliable supplier. You could become that reliable supplier. The cost of the commodity is expected to rise steadily over the foreseeable future, but the company is willing to pay more than the price that is current at the time. All you would need to do is make an investment, purchase the inventory and then deliver inventory to the company over the following year. One complication is that the commodity is available for purchase only seasonally, so at the end of every year you would need to purchase the supply for the following year. The customer pays promptly on delivery. An initial cash investment of $62,000 would be used to purchase $50,000 of inventory in December 2019. The remaining cash would be held for liquidity needs. In the following year, you would deliver this inventory to the customer. Inventory costs are expected to increase by $10,000 per year, and the customer agrees to pay $15,000 more than the current cost of inventory. So, during 2020, you would deliver inventory that originally cost $50,000, receive payment of $75,000 and pay $60,000 to purchase inventory for the current year. This pattern would continue in future years, but with annually increasing costs of inventory and corresponding increases in the price charged the customer. If you accept this proposal, your objective would be to receive $9,000 in dividends (about a 15% return on the $62,000 investment) at the end of each year. Assume your business would have an income tax rate of 40%. a. Construct a projected balance sheet as of the end of December 2019. b. Construct financial forecasts of income statements, cash flows (direct method) and balance sheets for the next three years (through 2022). Assume that your business would operate in a tax jurisdiction that requires the use of FIFO for inventory. c. Construct financial forecasts of income statements, cash flows (direct method) and balance sheets for the next three years (through 2022). Assume that your business would operate in a tax jurisdiction that requires the use of LIFO for inventory. Projected Balance Sheet Financial Statement Forecasts - FIFO Financial statement Forecasts - LIFO Note: Use negative signs with cash flow statement answers only, when appropriate. Otherwise do not use negative signs with answers. Year 2020 2021 2022 Income statement: $ Revenue COGS-FIFO 85,000 $ 60,000 ✓ 95,000 ✓ 70,000 ✓ 75,000 $ 50,000 ✓ 25,000 ✓ 10,000 ✓ Earnings before tax 25,000 ✓ 25,000 ✓ Tax expense 10,000 ✓ 10,000 ✓ 15,000 $ Net income $ 15,000 $ 15,000 ✓ Cash flows: Receipts 95,000✔ $ 75,000 $ 60,000 x 85,000 $ 70,000 x Inventory purchases 80,000 x Tax payments 10,000 x 10,000 x 10,000 x (4,000) x (4,000) x Dividends 9,000 x 9,000 x (4,000) x 9,000 x 0x (4,000) $ 0x 0x (4,000) $ (4,000)✓ Net change in cash Balance sheet: Assets Cash 4,000 $ 8,000 $ 60,000✔ 0 80,000✔ Inventory 70,000 ✓ Total 68,000 ✓ 74,000 ✓ 80,000✔ Shareholders' equity Contributed capital 68,000 x 74,000 x 62,000 ✓ 6,000✔ 6,000 x 6,000 x Retained earnings Total $ 68,000 $ 74,000 $ 80,000 ✓ Projected Balance Sheet Financial Statement Forecasts - FIFO Financial statement Forecasts - LIFO Note: Use negative signs with cash flow statement answers only, when appropriate. Otherwise do not use negative signs with answers. Year 2020 2021 2022 Income statement: $ 95,000 Revenue COGS-LIFO 85,000 $ 70,000 ✓ 80,000 ✓ 75,000 $ 60,000 ✓ 15,000 ✓ 6,000 ✓ 15,000 ✓ 15,000 ✓ Tax expense 6,000 ✓ 6,000 ✓ $ 9,000 $ 9,000 $ 9,000 ✓ $ 85,000 $ 95,000 ✓ 75,000 $ 60,000 x 70,000 x 80,000 x 6,000 x 6,000 x 6,000 x 9,000✔ 9,000 ✓ 9,000 ✓ 9,000 x 9,000 x 9,000 x (9,000)✓ (9,000)✓ (9,000)✓ 0✔ 12,000 50,000 ✓ 62,000 ✓ 62,000 0✔ 62,000✔ Cash from operations Cash from financing Earnings before tax Net income Cash flows: Receipts Inventory purchases Tax payments Dividends Net change in cash Balance sheet: Assets Cash Inventory Total Shareholders' equity Contributed capital Retained earnings Total Cash from operations Cash from financing $ $ $ 0$ 0$ $ 12,000 $ 12,000 $ 50,000 ✓ 50,000 ✓ 62,000 ✓ 62,000 ✓ 62,000 ✓ 62,000✔ 0✔ 0✓ $ 62,000 $ 62,000 $

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
icon
Related questions
Question
Calculating LIFO, FIFO, Income and Cash Flows
An acquaintance has proposed the following business plan to you. A local company requires a consistent quantity of a commodity and is looking for a reliable supplier. You
could become that reliable supplier.
The cost of the commodity is expected to rise steadily over the foreseeable future, but the company is willing to pay more than the price that is current at the time. All you
would need to do is make an investment, purchase the inventory and then deliver inventory to the company over the following year. One complication is that the
commodity is available for purchase only seasonally, so at the end of every year you would need to purchase the supply for the following year. The customer pays promptly
on delivery.
An initial cash investment of $62,000 would be used to purchase $50,000 of inventory in December 2019. The remaining cash would be held for liquidity needs. In the
following year, you would deliver this inventory to the customer. Inventory costs are expected to increase by $10,000 per year, and the customer agrees to pay $15,000
more than the current cost of inventory. So, during 2020, you would deliver inventory that originally cost $50,000, receive payment of $75,000 and pay $60,000 to purchase
inventory for the current year. This pattern would continue in future years, but with annually increasing costs of inventory and corresponding increases in the price charged
the customer.
If you accept this proposal, your objective would be to receive $9,000 in dividends (about a 15% return on the $62,000 investment) at the end of each year. Assume your
business would have an income tax rate of 40%.
a. Construct a projected balance sheet as of the end of December 2019.
b. Construct financial forecasts of income statements, cash flows (direct method) and balance sheets for the next three years (through 2022). Assume that your business
would operate in a tax jurisdiction that requires the use of FIFO for inventory.
c. Construct financial forecasts of income statements, cash flows (direct method) and balance sheets for the next three years (through 2022). Assume that your business
would operate in a tax jurisdiction that requires the use of LIFO for inventory.
Projected Balance Sheet Financial Statement Forecasts - FIFO
Financial statement Forecasts - LIFO
Note: Use negative signs with cash flow statement answers only, when appropriate. Otherwise do not use negative signs with answers.
Year
2020
2021
2022
Income statement:
Revenue
$
$
85,000 $
75,000
50,000
25,000 ✓
95,000
70,000
COGS-FIFO
60,000 ✓
Earnings before tax
25,000 ✓
25,000 ✓
Tax expense
10,000 ✓
10,000 ✓
10,000 ✓
15,000 $
Net income
$
15,000 $
15,000 ✓
Cash flows:
Receipts
$ 75,000 $
85,000 $
95,000 ✓
Inventory purchases
60,000 *
70,000 x
80,000 x
Tax payments
10,000 x
10,000 x
10,000 *
(4,000) *
(4,000) x
Dividends
9,000 x
(4,000) x
9,000 x
0 x
(4,000) $
9,000 x
0x
(4,000) $
0x
(4,000)✓
Net change in cash
Balance sheet:
Assets
Cash
4,000 $
0✓
8,000 $
60,000✔
Inventory
70,000 ✓
80,000✔
Total
68,000 ✓
74,000 ✓
80,000 ✓
Shareholders' equity
62,000
68,000 x
Contributed capital
Retained earnings
Total
74,000 *
6,000 x
6,000
6,000 x
$ 68,000 $ 74,000 $ 80,000
Projected Balance Sheet
Financial Statement Forecasts - FIFO
Financial statement Forecasts - LIFO
Note: Use negative signs with cash flow statement answers only, when appropriate. Otherwise do not use negative signs with answers.
Year
2020
2021
2022
Income statement:
$ 75,000 $
Revenue
COGS-LIFO
85,000 $
70,000 ✓
95,000 ✓
80,000
Earnings before tax
60,000 ✓
15,000 ✓
6,000 ✓
15,000 ✓
15,000 ✓
Tax expense
6,000 ✓
6,000 ✓
Net income
$
9,000 $
9,000 ✓ $
9,000 ✓
Cash flows:
Receipts
Inventory purchases
85,000 $
95,000 ✓
$ 75,000 $
60,000 *
70,000 x
80,000 *
Tax payments
6,000 x
6,000 x
6,000 x
Cash from operations
9,000 ✓
9,000 ✓
9,000 ✓
Dividends
9,000 *
9,000 *
9,000 *
Cash from financing
Net change in cash
Balance sheet:
(9,000)✓
0 $
(9,000)✓
0 $
(9,000)✓
0 ✓
$
Assets
Cash
$ 12,000 $
12,000 $
12,000
50,000 ✓
50,000 ✓
50,000 ✓
Inventory
Total
62,000 ✓
62,000 ✓
62,000
Shareholders' equity
62,000 ✓
62,000
Contributed capital
Retained earnings
Total
0✔
62,000 ✓
0✓
62,000 ✓
$ 62,000 $ 62,000 $
Cash from operations
Cash from financing
$
$
Transcribed Image Text:Calculating LIFO, FIFO, Income and Cash Flows An acquaintance has proposed the following business plan to you. A local company requires a consistent quantity of a commodity and is looking for a reliable supplier. You could become that reliable supplier. The cost of the commodity is expected to rise steadily over the foreseeable future, but the company is willing to pay more than the price that is current at the time. All you would need to do is make an investment, purchase the inventory and then deliver inventory to the company over the following year. One complication is that the commodity is available for purchase only seasonally, so at the end of every year you would need to purchase the supply for the following year. The customer pays promptly on delivery. An initial cash investment of $62,000 would be used to purchase $50,000 of inventory in December 2019. The remaining cash would be held for liquidity needs. In the following year, you would deliver this inventory to the customer. Inventory costs are expected to increase by $10,000 per year, and the customer agrees to pay $15,000 more than the current cost of inventory. So, during 2020, you would deliver inventory that originally cost $50,000, receive payment of $75,000 and pay $60,000 to purchase inventory for the current year. This pattern would continue in future years, but with annually increasing costs of inventory and corresponding increases in the price charged the customer. If you accept this proposal, your objective would be to receive $9,000 in dividends (about a 15% return on the $62,000 investment) at the end of each year. Assume your business would have an income tax rate of 40%. a. Construct a projected balance sheet as of the end of December 2019. b. Construct financial forecasts of income statements, cash flows (direct method) and balance sheets for the next three years (through 2022). Assume that your business would operate in a tax jurisdiction that requires the use of FIFO for inventory. c. Construct financial forecasts of income statements, cash flows (direct method) and balance sheets for the next three years (through 2022). Assume that your business would operate in a tax jurisdiction that requires the use of LIFO for inventory. Projected Balance Sheet Financial Statement Forecasts - FIFO Financial statement Forecasts - LIFO Note: Use negative signs with cash flow statement answers only, when appropriate. Otherwise do not use negative signs with answers. Year 2020 2021 2022 Income statement: Revenue $ $ 85,000 $ 75,000 50,000 25,000 ✓ 95,000 70,000 COGS-FIFO 60,000 ✓ Earnings before tax 25,000 ✓ 25,000 ✓ Tax expense 10,000 ✓ 10,000 ✓ 10,000 ✓ 15,000 $ Net income $ 15,000 $ 15,000 ✓ Cash flows: Receipts $ 75,000 $ 85,000 $ 95,000 ✓ Inventory purchases 60,000 * 70,000 x 80,000 x Tax payments 10,000 x 10,000 x 10,000 * (4,000) * (4,000) x Dividends 9,000 x (4,000) x 9,000 x 0 x (4,000) $ 9,000 x 0x (4,000) $ 0x (4,000)✓ Net change in cash Balance sheet: Assets Cash 4,000 $ 0✓ 8,000 $ 60,000✔ Inventory 70,000 ✓ 80,000✔ Total 68,000 ✓ 74,000 ✓ 80,000 ✓ Shareholders' equity 62,000 68,000 x Contributed capital Retained earnings Total 74,000 * 6,000 x 6,000 6,000 x $ 68,000 $ 74,000 $ 80,000 Projected Balance Sheet Financial Statement Forecasts - FIFO Financial statement Forecasts - LIFO Note: Use negative signs with cash flow statement answers only, when appropriate. Otherwise do not use negative signs with answers. Year 2020 2021 2022 Income statement: $ 75,000 $ Revenue COGS-LIFO 85,000 $ 70,000 ✓ 95,000 ✓ 80,000 Earnings before tax 60,000 ✓ 15,000 ✓ 6,000 ✓ 15,000 ✓ 15,000 ✓ Tax expense 6,000 ✓ 6,000 ✓ Net income $ 9,000 $ 9,000 ✓ $ 9,000 ✓ Cash flows: Receipts Inventory purchases 85,000 $ 95,000 ✓ $ 75,000 $ 60,000 * 70,000 x 80,000 * Tax payments 6,000 x 6,000 x 6,000 x Cash from operations 9,000 ✓ 9,000 ✓ 9,000 ✓ Dividends 9,000 * 9,000 * 9,000 * Cash from financing Net change in cash Balance sheet: (9,000)✓ 0 $ (9,000)✓ 0 $ (9,000)✓ 0 ✓ $ Assets Cash $ 12,000 $ 12,000 $ 12,000 50,000 ✓ 50,000 ✓ 50,000 ✓ Inventory Total 62,000 ✓ 62,000 ✓ 62,000 Shareholders' equity 62,000 ✓ 62,000 Contributed capital Retained earnings Total 0✔ 62,000 ✓ 0✓ 62,000 ✓ $ 62,000 $ 62,000 $ Cash from operations Cash from financing $ $
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 2 steps with 1 images

Blurred answer
Knowledge Booster
Uses Of Excess Cash
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
Accounting
ISBN:
9781259964947
Author:
Libby
Publisher:
MCG
Accounting
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education