Chapter 5, Problem 32P

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 32P

Computation of cost of goods sold under FIFO cost flow method is 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)

Computation of ending inventory under FIFO cost flow method is as follows:

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

Table (2)

Computation of income tax expense under FIFO cost flow method is 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)

(1) Calculate sales amount:

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

(2) Calculate income tax expense amount:

$\begin{array}{c}\text{Income tax expense}=\text{Income before tax}\times \text{Tax rate }\\ =\text{\$30,550}\times \frac{25}{100}\\ =\$7,638\end{array}$

a. 2

To determine

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

Answer to Problem 32P

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.

(3) Calculate income tax expense amount:

$\begin{array}{c}\text{Income tax expense}=\text{Income before tax}\times \text{Tax rate }\\ =\text{\$29,350}\times \frac{25}{100}\\ =\$7,338\end{array}$

a. 3

To determine

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

Answer to Problem 32P

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.

(4) Determine average unit cost:

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

(5) Calculate income tax expense amount:

$\begin{array}{c}\text{Income tax expense}=\text{Income before tax}\times \text{Tax rate }\\ =\text{\$29,882}\times \frac{25}{100}\\ =\$7,471\end{array}$

b.

To determine

Show the 2018’s income statement, balance sheet and statement of cash flows under FIFO, LIFO and weighted average using a vertical model.

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.

Prepare the 2018’s income statement of Company W under each cost flow method as follows:

Company W
Income Statements
For Year Ended December 31, 2018
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)

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.

Prepare the 2018’s Balance sheet of Company W under each cost flow method as follows:

Company W
Balance sheet
For Year Ended December 31, 2018
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)

Statement of cash flows: Statement of cash flows reports all the cash transactions which are responsible for inflow and outflow of cash and result of these transactions is reported as ending balance of cash at the end of reported period. Statement of cash flows includes the changes in cash balance due to operating, investing, and financing activities.

Prepare the 2018’s statement of cash flows of Company W under each cost flow method:

Company W
Statement of cash flows
For Year Ended December 31, 2018
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 Salaries Expense	($38,000)	($38,000)	($38,000)
Cash Outflow for Income Tax expense	($7,638)	($7,338)	($7,471)
Net Cash Flow from Operating Activities	$36,712	$37,012	$36,879
Cash Flows From Investing Activities:	$0	$0	$0
Cash Flows From Financing Activities:	$0	$0	$0
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)

Working Note:

Record the events in an accounting equation:

Event	Assets			=	Stockholders’ Equity
	Cash	+	Inventory	=	Common Stock	Retained Earnings
FIFO Cost Flow
Beginning Balance	$80,100	+	$33,000	=	$50,000	$63,100
1. First Purchase	(23,250)	+	23,250	=
2. Second Purchase	(25,600)	+	25,600	=
3a. Sale of Inventory	131,200	+		=		131,200
3b. Cost of Goods Sold		+	(62,650)	=		(62,650)
4. Paid Salary Expense	(38,000)	+		=		(38,000)
5. Paid Income Tax expense	(7,638)	+		=		(7,638)
Totals	$116,812	+	$19,200	=	$50,000	$86,012
LIFO Cost Flow
Beginning Balance	$80,100	+	$33,000	=	$50,000	$63,100
1. First Purchase	(23,250)	+	23,250	=
2. Second Purchase	(25,600)	+	25,600	=
3a. Sale of Inventory	131,200	+		=		131,200
3b. Cost of Goods Sold		+	(63,850)	=		(63,850)
4. Paid Operating Expenses	(38,000)	+		=		(38,000)
5. Paid Income Tax expense	(7,338)	+		=		(7,338)
Totals	$117,112	+	$18,000	=	$50,000	$85,112
Weighted Average
Beginning Balance	$80,100	+	$33,000	=	$50,000	$63,100
1. First Purchase	(23,250)	+	23,250	=
2. Second Purchase	(25,600)	+	25,600	=
3a. Sale of Inventory	131,200	+		=		131,200
3b. Cost of Goods Sold		+	(63,318)	=		(63,318)
4. Paid Operating  Expenses	(38,000)	+		=		(38,000)
5. Paid Income Tax	(7,471)	+		=		(7,471)
Totals	$116,979	+	$18,532	=	$50,000	$85,511

Table (16)