Chapter 5, Problem 63PB

The following information is for Falling Numbers Computers for the year ended December 31, 2010.

At January 1, 2010:

• Cash amounted to $20,000.
• Beginning inventory was $35,000 (1,400 units at $25 each).
• Contributed capital was $25,000.
• Retained earnings was $45,000.

Transactions during 2010:

• Purchased 1,250 units for cash at $30 each
• Purchased 750 more units for cash at $20 each
• Cash sales of 2,400 units at $50 each
• Paid $10,000 cash for operating expenses
• Paid cash for income taxes at a rate of 40% of net income

Requirements

1. 1. Compute the cost of goods sold 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, and statement of cash flows for the fiscal 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 fiscal year ended December 31, 2010.
5. 5. At the end of the year, the current replacement cost of the inventory is $33,000. 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).