Chapter 5, Problem 52PA

The following information is for Leo’s Solar Supplies for the year ending December 31, 2010.

At January 1, 2010:

• Cash amounted to $15,550.
• Beginning inventory was $20,000 (100 units at $200 each).
• Contributed capital was $19,000.
• Retained earnings was $16,550.

Transactions during 2010:

• Purchased 250 units for cash at $225 each
• Purchased 100 more units for cash at $250 each
• Cash sales of 300 units at $400 each
• Paid $11,500 cash for operating expenses
• Paid cash for income tax at a rate of 30% of net income

Requirements

1. 1. Compute the cost of goods sold for the year and ending inventory at December 31, 2010, using each of the following cost flow methods:
   1. a. FIFO periodic
   2. b. LIFO periodic
   3. c. Weighted average cost periodic
2. 2. For each method, prepare the balance sheet at December 31, 2010, a multistep income statement, statement of cash flows, and statement of changes in shareholders’ equity for Leo’s for the year ended December 31, 2010.
3. 3. What is income before taxes and net income after taxes under each of the three inventory cost flow assumptions? What observations can you make about net income from the analysis of the three methods?
4. 4. For each method, calculate the inventory turnover ratio and average days in inventory for the year ended December 31, 2010.
5. 5. At the end of the year, the current replacement cost of the inventory is $35,000. Indicate at what amount the company’s inventory will be reported using the lower-of-cost-or-market rule for each method (FIFO, LIFO, and weighted average cost).