Question

The Brick Company had cash sales of $229,900 for Year 1, its first year of operation. On April 2, the company purchased 226 units of Inventory at $175 per unit. On September 1, an additional 170 units were purchased for $193 per unit. The company had 62 units on hand at the end of the year. The company's income tax rate is 40 percent. All transactions are cash transactions. Required a. The preceding paragraph describes five accounting events: (1) a sales transaction, (2) the first purchase of inventory. (3) a second purchase of inventory, (4) the recognition of cost of goods sold expense, and (5) the payment of income tax expense. Show the amounts of each event in horizontal statements models like the following ones, assuming first a FIFO and then a LIFO cost flow. b. Compute net income using FIFO. c. Compute net income using LIFO. e. Which method, FIFO or LIFO, produced the larger amount of assets on the balance sheet?

Answer 1

a)

THE BRICK COMPANY
Effect of Events on Financial Statements
Panel 1: FIFO Cost Flow
Event No.	Balance Sheet					Income Statement					Cash Flows
	Cash	+	Inventory	=	Retained Earnings	Revenue	-	Expenses	=	Net Income
1)	$229,900				$229,900	$229,900					$229,900	Increase
2)	($39,550)		$39,550								($39,550)	Decrease
3)	($32,810)		$32,810								($32,810)	Decrease
4)			($60,394)		($60,394)			($60,394)
5)	($67,802.40)				($67,802.40)			($67,802.40)			($67,802.40)	Decrease
Bal.	$89,738		$11,966		$101,704	$229,900		($128,196)		$101,704	$89,738	Increase
THE BRICK COMPANY
Effect of Events on Financial Statements
Panel 1: LIFO Cost Flow
Event No.	Balance Sheet					Income Statement					Cash Flows
	Cash	+	Inventory	=	Retained Earnings	Revenue	-	Expenses	=	Net Income
1)	$229,900				$229,900	$229,900					$229,900	Increase
2)	($39,550)		$39,550								($39,550)	Decrease
3)	($32,810)		$32,810								($32,810)	Decrease
4)			($61,510)		($61,510)			($61,510)
5)	($67,356)				($67,356)			($67,356)			($67,356)	Decrease
Bal.	$90,184		$10,850		$101,034	$229,900		($128,866)		$101,034	$90,184	Increase

.

Working notes:	Units (a)	Rate (b)	Amount (a*b)
April 2nd - Purchase	226	$175	$39,550
Sep 1 - Purchases	170	$193	$32,810
Total units available	396
Less: Ending Inventory	62
Units sold	334
FIFO:	Units (a)	Rate (b)	Amount (a*b)
April 2nd - Purchase	226	$175	$39,550
Sep. 1 - Purchase (334 - 226)	108	$193	$20,844
Cost of Goods Sold under FIFO	334		$60,394
Cost of Ending Inventory	62	$193	$11,966
LIFO:	Units (a)	Rate (b)	Amount (a*b)
Sep 1 - Purchases	170	$193	$32,810
Apr. 2nd - Purchase (334 - 170)	164	$175	$28,700
Cost of Goods Sold under LIFO	334		$61,510
Cost of Ending Inventory	62	$175	$10,850
b & c)
	FIFO	LIFO
Sales Revenue	$229,900	$229,900
Less: Cost of Goods Sold	($60,394)	($61,510)
Gross Profit	$169,506	$168,390
Less: Operating Expenses	$0	$0
Net Income before tax	$169,506	$168,390
Less: Income tax ($169,506*40/100); ($168,390*40/100)	($67,802.40)	($67,356)
Net Income after tax	$101,704	$101,034

e)
FIFO:
Cash	$89,738
Inventory	$11,966
Total Assets	$101,704
LIFO:
Cash	$90,184
Inventory	$10,850
Total Assets	$101,034

FIFO method produced larger amount of assets on the balance sheet.