Chapter 5, Problem 21E

a.

To determine

Prepare income statement using FIFO and LIFO.

Explanation of Solution

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.

Prepare income statement using FIFO as follows:

Company P
Income Statements (FIFO)
For the Year Ended December 31, 2016
Particulars	Amount
Sales revenue (1)	$243,000
Less: Cost of Goods Sold Table (2)	($93,400)
Gross Margin	$149,600
Less: Operating Expenses	($41,500)
Income Before Tax	$108,100
Less: Income Tax Expense (3)	($32,430)
Net Income	$75,670

Table (1)

Working Note:

(1) Calculate the sales revenue.

$\begin{array}{c}\text{Sales revenue}=\left(\begin{array}{l}\text{Units of inventory}\\ \text{ to be sold}\end{array}\right)\times \left(\begin{array}{l}\text{Sale price}\\ \text{ per unit}\end{array}\right)\\ =2,700\text{ units}\times \text{\$90 per unit}\\ \text{=\$243,000}\end{array}$

(2) Calculate cost of goods sold amount under FIFO:

Computation of cost of goods sold
Particulars	Unit	Unit cost	Total cost
Purchases:
January 1	400	$30	$12,000
April 1	2,000	$35	$70,000
October 1	300	$38	$11,400
Cost of goods sold	2,700		$93,400

Table (2)

(3) Calculate income tax expense amount:

$\begin{array}{c}\text{Income tax expenses}=\left[\begin{array}{l}\text{sales}-\text{cost of goods}\\ \text{sold}-\text{operating expense}\end{array}\right]\times \frac{\text{30}}{100}\\ =\$243,000-\$93,400-\$41,500\times \frac{\text{30}}{100}\\ =\$108,100\times \frac{\text{30}}{100}\\ =\$32,430\end{array}$

Prepare income statement using LIFO as follows:

Company P
Income Statements (LIFO)
For the Year Ended December 31, 2016
Particulars	Amount
Sales revenue (4)	$243,000
Less: Cost of Goods Sold Table (4)	($95,800)
Gross Margin	$147,200
Less: Operating Expenses	($41,500)
Income Before Tax	$105,700
Less: Income Tax Expense (6)	($31,710)
Net Income	$73,990

Table (3)

Working Note:

(4) Calculate the sales revenue.

$\begin{array}{c}\text{Sales revenue}=\left(\begin{array}{l}\text{Units of inventory}\\ \text{ to be sold}\end{array}\right)\times \left(\begin{array}{l}\text{Sale price}\\ \text{ per unit}\end{array}\right)\\ =2,700\text{ units}\times \text{\$90 per unit}\\ \text{=\$243,000}\end{array}$

(5) Calculate cost of goods sold amount under LIFO:

Computation of cost of goods sold
Particulars	Unit	Unit cost	Total cost
Purchases:
October 1	600	$38	$22,800
April 1	2,000	35	70,000
January 1	100	30	3,000
Cost of goods sold	2,700		95,800

Table (4)

(6) Calculate income tax expense amount:

$\begin{array}{c}\text{Income tax expenses}=\left[\begin{array}{l}\text{Sales}-\text{Cost of goods}\\ \text{sold}-\text{Operating expense}\end{array}\right]\times \frac{\text{30}}{100}\\ =\$243,000-\$95,800-\$41,500\times \frac{\text{30}}{100}\\ =\$105,700\times \frac{\text{30}}{100}\\ =\$31,710\end{array}$

b.

To determine

Ascertain the amount of income tax that Company P Would pay using each cost flow method.

Explanation of Solution

Income Tax Expenses: The expenses which are related to the taxable income of the individuals and business entities for an accounting period, and are recognized by them for the purpose of federal government and state government tax are called as income tax expenses.

• The amount of income tax that Company P would pay under FIFO cost method is $32,430.
• The amount of income tax that Company P would pay under LIFO cost method is $31,710.

c.

To determine

Ascertain the cash flow from operating activities under FIFO and LIFO.

Explanation of Solution

Cash flows from operating activities:  This section of cash flow statement provides information about the cash received or cash paid in day-to-day operating activities of a company.

Ascertain the cash flow from operating activities under FIFO and LIFO as follows:

Company P
Cash Flows from Operating Activities
Particulars	FIFO	LIFO
Cash Flows From Operating Activities:
Cash Inflow from Customers	$243,000	$243,000
Less: Cash Outflow for Inventory (3)	($92,800)	($92,800)
Cash Outflow for Operating Expense	($41,500)	($41,500)
Cash Outflow for Income Tax Expense	($32,430)	($31,710)
Net Cash Flow from Operating Activities	$76,270	$76,990

Table ()

Working notes:

3. Calculate cash outflow for Inventory amount:

$\begin{array}{c}\text{Cash paid for inventory}=\left[\begin{array}{l}\text{Purchased made on April 1}+\\ \text{Purchased made on october 1}\end{array}\right]\\ =\$70,000+\$22,800\\ =\$92,800\end{array}$

d.

To determine

Describe why does the cash flow from operating activities differs between FIFO and LIFO.

Explanation of Solution

Due to the difference in the amount of income tax paid under the two methods, the cash flow from operating activities differs between FIFO and LIFO. Under FIFO, the taxable income would be greater. Hence, the amount of income tax paid would be higher which causes greater cash flow for tax expense.