Chapter 5, Problem 19AP

a. 1

To determine

Compute the cost of goods sold, ending inventory, and the income tax expense under FIFO cost flow method.

Answer to Problem 19AP

Compute the cost of goods sold under FIFO cost flow method as follows:

FIFO	Units	Unit Cost	Cost of Goods Sold
Beginning Inventory	220	$150	$33,000
First Purchase	150	155	23,250
Second Purchase	40	160	6,400
Total	410		$62,650

Table (1)

Compute the ending inventory under FIFO cost flow method as follows:

FIFO	Units	Unit Cost	Ending Inventory
Second Purchase	120 Table (4)	$160	$19,200

Table (2)

Compute the income tax expense under FIFO cost flow method as follows:

Computation of Income Tax Expense and Net Income
Particulars	FIFO
Sales (1)	$131,200
Less: Cost of Goods Sold	62,650
Gross Margin	68,550
Less: Salaries Expense	38,000
Income Before Tax	30,550
Less: Income Tax (2)	7,638
Net Income	$22,912

Table (3)

Explanation of Solution

First-in-First-Out:

In First-in-First-Out method, the costs of the initially purchased items are considered as cost of goods sold, for the items which are sold first. The value of the ending inventory consists of the recent purchased items.

Cost of goods sold:

Cost of goods sold is the accumulate total of all direct cost incurred in manufacturing the goods or the products which has been sold during a period. Cost of goods sold involves direct material, direct labor, and manufacturing overheads.

Ending Inventory: It represents the quantity and price of the goods unsold and laying at the store at the end of a particular period.

Working notes:

Calculate total purchase amount:

Inventory Purchases
Particulars	Units	Unit Cost	Total cost
Beginning Inventory	220	$150	$33,000
First Purchase	150	155	23,250
Second Purchase	160	160	25,600
Goods available for sale	530		$81,850
Less: Cost of goods sold	410
Ending inventory	120

Table (4)

Calculate sales amount:

$\begin{array}{c}\text{Sales}=\text{410 Units}\times \text{\$320}\\ =\text{\$131,200}\end{array}$ (1)

Calculate income tax expense amount:

$\begin{array}{c}Incometax\exp esnse=\text{25\% of income before tax}\\ =\text{\$30,550}\times \frac{25}{100}\\ =\$7,638\end{array}$ (2)

a. 2

To determine

Compute the cost of goods sold and the ending inventory under LIFO cost flow method.

Answer to Problem 19AP

Compute the cost of goods sold under LIFO cost flow method as follows:

LIFO	Units	Unit Cost	Cost of Goods Sold
Second Purchase	160	$160	$25,600
First Purchase	150	155	23,250
Beginning Inventory	100	150	15,000
Total	410		$63,850

Table (5)

Compute the ending inventory under LIFO cost flow method as follows:

LIFO	Units	Unit Cost	Ending Inventory
Second Purchase	120 Table (4)	$150	$18,000

Table (6)

Compute the income tax expense under LIFO cost flow method as follows:

Computation of Income Tax Expense and Net Income
Particulars	LIFO
Sales (1)	$131,200
Less: Cost of Goods Sold	63,850
Gross Margin	67,350
Less: Salaries Expense	38,000
Income Before Tax	29,350
Less: Income Tax (3)	7,338
Net Income	$22,012

Table (7)

Explanation of Solution

Last-in-Last-Out:

In Last-in-First-Out method, the costs of last purchased items are considered as the cost of goods sold, for the items which are sold first. The value of the closing stock consists of the initial purchased items.

Calculate income tax expense amount:

$\begin{array}{c}Incometax\exp esnse=\text{25\% of income before tax}\\ =\text{\$29,350}\times \frac{25}{100}\\ =\$7,338\end{array}$ (3)

a. 3

To determine

Compute the cost of goods sold and the ending inventory under weighted average cost flow method.

Answer to Problem 19AP

Compute the cost of goods sold and the ending inventory under weighted average cost flow method as follows:

Weighted average	Units	Unit Cost	Total cost
Cost of goods sold	410	$154.43 (4)	$63,318
Ending inventory	120	$154.43 (4)	18,532

Table (8)

Compute the income tax expense under weighted average cost flow method as follows:

Computation of Income Tax Expense and Net Income
Particulars	LIFO
Sales (1)	$131,200
Less: Cost of Goods Sold	63,318
Gross Margin	67,882
Less: Salaries Expense	38,000
Income Before Tax	29,882
Less: Income Tax (5)	7,471
Net Income	$22,411

Table (9)

Explanation of Solution

Weighted-average cost method:

Under Weighted average cost method, the company calculates a new average cost after every purchase is made. It is determined by dividing the cost of goods available for sale by the units on hand.

Determine average unit cost:

$\begin{array}{c}\text{Average Unit cost}=\frac{\text{Goods avaivable for sale}}{\text{Total Units}}\\ =\frac{\text{\$81,850 Table}\left(4\right)}{530}\\ =\text{\$154}\text{.43}\end{array}$ (4)

Calculate income tax expense amount:

$\begin{array}{c}Incometax\exp esnse=\text{25\% of income before tax}\\ =\text{\$29,882}\times \frac{25}{100}\\ =\$7,471\end{array}$ (5)

b. 1

To determine

Record the given transactions in general journal form and post them to T-accounts under FIFO cost flow method.

Explanation of Solution

Journal:

Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system of Accounting.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.

Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

Ledger:

Ledger is the book, where the debit and credit entries recorded in the journal book are transferred to their relevant accounts. The entire accounts of the company are collectively called the ledger.

First-in-First-Out:

In First-in-First-Out method, the costs of the initially purchased items are considered as cost of goods sold, for the items which are sold first. The value of the ending inventory consists of the recent purchased items.

Record the given transactions in general journal form under FIFO cost flow method as follows:

Journal
Date			Account Title and Explanation	Post	Debit	Credit
				Ref.	($)	($)
Year 2	1.		Merchandise Inventory		23,250
			Cash			23,250
			(To record the purchase of inventory)
Year 2	2.		Merchandise Inventory		25,600
			Cash			25,600
			(To record the purchase of inventory)
Year 2	3.		Cash (1)		131,200
			Sales Revenue			131,200
			(To record the sales revenue)
Year 2			Cost of Goods Sold (Table (1))		62,650
			Merchandise Inventory			62,650
			(To record the cost of goods sold)
Year 2	4.		Salaries Expense		38,000
			Cash			38,000
			(To record the salaries expenses incurred)
Year 2		5.	Income Tax Expense (2)		7,638
			Cash			7,638
			(To record the income tax expenses incurred)

Table (10)

Post the given transactions to T-accounts using FIFO as follows:

Cash
Bal	80,100
Year 2	131,200	1.	23,250
		2.	25,600
		4.	38,000
		5.	7,638
Bal.	116,812

Sales revenue
		3.	131,200
		Bal.	131,200

Merchandise Inventory
Bal	33,000
1.	23,250
2.	25,600	3.	62,650
Bal.	19,200

Cost of goods sold
3.	62,650
Bal.	62,650

Common stock
		Bal	50,000
		Bal.	50,000

Retained earnings
		Bal	63,100
		Bal.	63,100

Salaries expenses
4.		38,000
Bal.		38,000
Income tax expenses
5.	7,638
Bal.	7,638

b. 2

To determine

Record the given transactions in general journal form and post them to T-accounts under LIFO cost flow method.

Explanation of Solution

Last-in-Last-Out:

In Last-in-First-Out method, the costs of last purchased items are considered as the cost of goods sold, for the items which are sold first. The value of the closing stock consists of the initial purchased items.

Record the given transactions in general journal form under LIFO cost flow method as follows:

Journal
Date			Account Title and Explanation	Post	Debit	Credit
				Ref.	($)	($)
Year 2	1.		Merchandise Inventory		23,250
			Cash			23,250
			(To record the purchase of inventory)
Year 2	2.		Merchandise Inventory		25,600
			Cash			25,600
			(To record the purchase of inventory)
Year 2	3.		Cash (1)		131,200
			Sales Revenue			131,200
			(To record the sales revenue)
Year 2			Cost of Goods Sold (Table (5))		63,850
			Merchandise Inventory			63,850
			(To record the cost of goods sold)
Year 2	4.		Salaries Expense		38,000
			Cash			38,000
			(To record the salaries expenses incurred)
Year 2		5.	Income Tax Expense (3)		7,338
			Cash			7,338
			(To record the income tax expenses incurred)

Table (11)

Post the given transactions to T-accounts using LIFO as follows:

Cash
Bal	80,100
Year 2	131,200	1.	23,250
		2.	25,600
		4.	38,000
		5.	7,338
Bal.	117,112

Sales revenue
		3.	131,200
		Bal.	131,200

Merchandise Inventory
Bal	33,000
1.	23,250
2.	25,600	3.	63,850
Bal.	18,000

Cost of goods sold
3.	63,850
Bal.	63,850

Common stock
		Bal	50,000
		Bal.	50,000

Retained earnings
		Bal	63,100
		Bal.	63,100

Salaries expenses
4.		38,000
Bal.		38,000
Income tax expenses
5.	7,338
Bal.	7,338

b. 3

To determine

Record the given transactions in general journal form and post them to T-accounts under weighted average cost flow method.

Explanation of Solution

Weighted-average cost method:

Under Weighted average cost method, the company calculates a new average cost after every purchase is made. It is determined by dividing the cost of goods available for sale by the units on hand.

Record the given transactions in general journal form under weighted average cost flow method as follows:

Journal
Date			Account Title and Explanation	Post	Debit	Credit
				Ref.	($)	($)
Year 2	1.		Merchandise Inventory		23,250
			Cash			23,250
			(To record the purchase of inventory)
Year 2	2.		Merchandise Inventory		25,600
			Cash			25,600
			(To record the purchase of inventory)
Year 2	3.		Cash (1)		131,200
			Sales Revenue			131,200
			(To record the sales revenue)
Year 2			Cost of Goods Sold (Table (8))		63,318
			Merchandise Inventory			63,318
			(To record the cost of goods sold)
Year 2	4.		Salaries Expense		38,000
			Cash			38,000
			(To record the salaries expenses incurred)
Year 2		5.	Income Tax Expense (5)		7,471
			Cash			7,471
			(To record the income tax expenses incurred)

Table (12)

Post the given transactions to T-accounts using weighted average as follows:

Cash
Bal	80,100
Year 2	131,200	1.	23,250
		2.	25,600
		4.	38,000
		5.	7,471
Bal.	116,979

Sales revenue
		3.	131,200
		Bal.	131,200

Merchandise Inventory
Bal	33,000
1.	23,250
2.	25,600	3.	63,318
Bal.	18,532

Cost of goods sold
3.	63,318
Bal.	63,318

Common stock
		Bal	50,000
		Bal.	50,000

Retained earnings
		Bal	63,100
		Bal.	63,100

Salaries expenses
4.		38,000
Bal.		38,000
Income tax expenses
5.	7,471
Bal.	7,471

c.

To determine

Show the Year 2’s income statement, balance sheet and statement of cash flows under FIFO, LIFO and weighted average using a vertical model.

Answer to Problem 19AP

• Show the Year 2’s income statement of Company W under each cost flow method as follows:

Company W
Income Statements
For Year Ended December 31, Year 2
Particulars	FIFO ($)	LIFO ($)	Weighted average ($)
Sales	$131,200	$131,200	$131,200
Less: Cost of Goods Sold	62,650	63,850	63,318
Gross Margin	68,550	67,350	67,882
Less: Salaries Expense	38,000	38,000	38,000
Income Before Tax	30,550	29,350	29,882
Less: Income Tax Expense	7,638	7,338	7,471
Net Income	$22,912	$22,012	$22,411

Table (13)

• Show the Year 2’s Balance sheet of Company W under each cost flow method as follows:

Company W
Balance sheet
For Year Ended December 31, Year 2
Particulars	FIFO ($)	LIFO ($)	Weighted average ($)
Assets:
Cash	$116,812	$117,112	$116,979
Inventory	19,200	18,000	18,532
Total Assets	$136,012	$135,112	$135,511
Stockholders’ Equity
Common Stock	$50,000	$50,000	$50,000
Retained Earnings	86,012	85,112	85,511
Total Stockholders’ Equity	$136,012	$135,112	$135,511

Table (14)

• Show the Year 2’s statement of cash flows of Company W under each cost flow method as follows:

Company W
Statement of cash flows
For Year Ended December 31, Year 2
Particulars	FIFO ($)	LIFO ($)	Weighted average ($)
Cash Flows From Operating Activities:
Cash Inflow from Customers	$131,200	$131,200	$131,200
Less: Cash Outflow for Inventory	48,850	48,850	48,850
Cash Outflow for Sal. Exp.	38,000	38,000	38,000
Cash Outflow for Income Tax	7,638	7,338	7,471
Net Cash Flow from Operating Activities	36,712	37,012	36,879
Cash Flows From Investing Activities:	-	-	-
Cash Flows From Financing Activities:	-	-	-
Net Change in Cash	36,712	37,012	36,879
Add: Beginning Cash Balance	80,100	80,100	80,100
Ending Cash Balance	$116,812	$117,112	$116,979

Table (15)

Explanation of Solution

Financial statement:

The financial statement records and shows all the financial status of the business. The financial statement consists of the balance sheet, income statement, statement of retained earnings, and the cash flow statement.

Income statement:

The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Balance sheet:

A balance sheet is a financial statement consists of the assets, liabilities, and the stockholder’s equity of the company. The balance of the assets account must be equal to that of the liabilities and the stockholder’s equity account.