Chapter 6, Problem 8BPSB

To determine

Concept Introduction:

Income Statement:

Income statement is a financial summary about company's revenues, expenses, profits or losses over a period of time.

Periodic Inventory System:

It updates the closing inventory in the ledger after the physical count is done.

Last in first out (LIFO):

It is the inventory valuation method in which inventory purchased at the end is first sold out. Hence the closing inventory count is done from beginning.

First in first out (FIFO):

It is the inventory valuation method in which inventory purchased in the beginning of the year is first sold out. Hence the closing inventory count is done from end.

Weighted Average:

It is the inventory valuation in which total value of inventory is divided by the total inventory.

To prepare:

Comparative Income statement using three methods when a company uses periodic inventory system.

Answer to Problem 8BPSB

Particulars	FIFO	LIFO	Weighted Average
Sales	$400,000	$400,000	$400,000
Less: Cost of goods sold	($245,000)	($251,840)	($248,000)
Gross profit	$155,000	$148,160	$152,000
Less: Expenses	($60,000)	($60,000)	($60,000)
Income before taxes	$95,000	$88,160	$92,000
Income tax expense(40%)	($38,000)	($35,264)	($36,800)
Net Income	$57,000	$52,896	$55,200

Explanation of Solution

  $Sales=unitssold\times sellingpriceperunit$

  $sales=4,000*\$100$

  $\begin{array}{l}Closingstockunits=totalunits–unitssold\\ Closingstockunits=6,000–\text{ 5},000=\text{ 1},000\end{array}$

Valuation of Closing stock is done as:

Under FIFO:

  $1,000*\$65=\$65,000$

Under LIFO:

  $(840*\$58+160*\$59)=\$58,160$

Under weighted average:

  $1,000*\$62=\$62,000$

Price in weighted average is calculated as:

  $\frac{840*\$58+600*\$59+1,205*\$61+700*\$64+1,655*\$65}{840+600+1,205+700+1,655}=\$62$

Particulars	FIFO	LIFO	Weighted Average
Total Sales	$310,000	$310,000	$310,000
Less: Closing stock	$65,000	$58,160	$62,000
Cost of goods sold	$245,000	$251,840	$248,000

Total sales is calculated as:

Date	Particulars	Quantity	Rate	Value
	Beginning Inventory	840	$58	$48,720
2-Apr	Purchase	600	$59	$35,400
14-Jun	Purchase	1,205	$61	$73,505
29-Aug	Purchase	700	$64	$44,800
18-Nov	Purchase	1,655	$65	$107,575
				$310,000

Calculation of Net Income is as follows-FIFO-

  $\begin{array}{l}\begin{array}{l}Grossprofit=Sales-Costofgoodssold\hfill \\ Grossprofit=\$400,000-\$245,000\hfill \end{array}\\ Grossprofit=155,000\\ \\ \begin{array}{l}Incomebeforetaxes=Grossprofit–Expenses\hfill \\ Incomebeforetaxes=155,000-60,000\hfill \\ Incomebeforetaxes=95,000\hfill \end{array}\\ \\ \begin{array}{l}Incometaxexpense=Incomebeforetax*Taxrate\hfill \\ Incometaxexpense=95,000*40\%\hfill \\ Incometaxexpense=38,000\hfill \\ \hfill \end{array}\\ \begin{array}{l}Netincome=Incomebeforetaxes-Incometaxexpense\hfill \\ Netincome=95,000-38,000\hfill \\ Netincome=57,000\hfill \end{array}\end{array}$

LIFO-

  $\begin{array}{l}\begin{array}{l}Grossprofit=Sales-Costofgoodssold\hfill \\ Grossprofit=\$400,000-\$251,840\hfill \end{array}\\ Grossprofit=148,160\\ \\ \begin{array}{l}Incomebeforetaxes=Grossprofit–Expenses\hfill \\ Incomebeforetaxes=148,160-60,000\hfill \\ Incomebeforetaxes=88,160\hfill \end{array}\\ \\ \begin{array}{l}Incometaxexpense=Incomebeforetax*Taxrate\hfill \\ Incometaxexpense=88,160*40\%\hfill \\ Incometaxexpense=35,264\hfill \\ \hfill \end{array}\\ \begin{array}{l}Netincome=Incomebeforetaxes-Incometaxexpense\hfill \\ Netincome=88,160-35,264\hfill \\ Netincome=52,896\hfill \end{array}\end{array}$

Weighted Average-

  $\begin{array}{l}\begin{array}{l}Grossprofit=Sales-Costofgoodssold\hfill \\ Grossprofit=\$400,000-\$248,000\hfill \end{array}\\ Grossprofit=152,000\\ \\ \begin{array}{l}Incomebeforetaxes=Grossprofit–Expenses\hfill \\ Incomebeforetaxes=152,000-60,000\hfill \\ Incomebeforetaxes=92,000\hfill \end{array}\\ \\ \begin{array}{l}Incometaxexpense=Incomebeforetax*Taxrate\hfill \\ Incometaxexpense=92,000*40\%\hfill \\ Incometaxexpense=36,800\hfill \\ \hfill \end{array}\\ \begin{array}{l}Netincome=Incomebeforetaxes-Incometaxexpense\hfill \\ Netincome=92,000-36,800\hfill \\ Netincome=55,200\hfill \end{array}\end{array}$

Conclusion-Thus, Income statement is prepared.

To determine

Concept Introduction:

Last in first out (LIFO):

It is the inventory valuation method in which inventory purchased at the end is first sold out. Hence the closing inventory count is done from beginning.

First in first out (FIFO):

It is the inventory valuation method in which inventory purchased in the beginning of the year is first sold out. Hence the closing inventory count is done from end.

Weighted Average:

It is the inventory valuation in which total value of inventory is divided by the total inventory.

To Explain:

To explain the changes in financial results by using inventory costing methods.

Answer to Problem 8BPSB

As the purchase price of the inventory decresaes, the closing stock will be lower in case of FIFO method of inventory costing. The decrease in closing stockincreases cost of goods sold. The more cost of goods sold decreases gross profit under FIFO than LIFO. So, the net income will be lower under FIFO costing method.

Explanation of Solution

The requirement is explained in the answer.

To determine

Concept Introduction:

Last in first out (LIFO):

It is the inventory valuation method in which inventory purchased at the end is first sold out. Hence the closing inventory count is done from beginning.

First in first out (FIFO):

It is the inventory valuation method in which inventory purchased in the beginning of the year is first sold out. Hence the closing inventory count is done from end.

To Explain:

The advantages and disadvantages of LIFO and FIFO method.

Answer to Problem 8BPSB

Particulars	FIFO	LIFO
Advantages	It assigns the lower amount to cost of goods sold.	It assigns the highest amount to cost of goods sold.
Disadvantages	The net income is higher.	The net income is lower.

Explanation of Solution

The requirement is explained in the answer.