a. 1
Compute the cost of goods sold, ending inventory, and the income tax expense under FIFO cost flow method.
a. 1
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:
(2) Calculate income tax expense amount:
a. 2
Compute the cost of goods sold and the ending inventory under LIFO cost flow method.
a. 2
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:
a. 3
Compute the cost of goods sold and the ending inventory under weighted average cost flow method.
a. 3
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:
(5) Calculate income tax expense amount:
b.
Show the 2018’s income statement,
b.
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
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
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: | |||
$131,200 | $131,200 | $131,200 | |
Less: | $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
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)
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