Question

The accounting records of Wall's China Shop reflected the following balances as of January 1, Year 2: Cash $ 18,900 Beginning inventory: 14,105 (155 units @ $91) Common stock: 16,000 Retained earnings: 17,005 The following five transactions occurred in Year 2: First purchase (cash) 120 units @ $93 Second purchase (cash) 200 units @ $101 Sales (all cash) 420 units @ $191 Paid $15,100 cash for salaries expenses. Paid cash for income tax at the rate of 40 percent of income before taxes. Required: a. Compute the cost of goods sold and ending inventory, assuming (1) FIFO cost flow, (2) LIFO cost flow, and (3) weighted-average cost flow. Compute the income tax expense for each method. b. (this part has been omitted) c. Use a vertical model to show the Year 2 income statement, balance sheet, and statement of cash flows under FIFO, LIFO, and weighted average.

Answer 1

Opening Trial balance:
	Debit	Credit
Cash	18900
Inventory (155@91)	14105
Common Stock		16000
Retained earnings		17005
Total	33005	33005
Inventory account:
Opening balance	155 @ 91	14105
Purchases:
Cash	120 @ 93	11160
	200 @ 101	20200
Total purchases		31360
Total inventory	475	45465
Average cost		95.71579
Sales	420
Closing Inventory	55 units
Expenses (salary)	15100
a) COGS:
FIFO = 14105+11160+(145*101)=39910
LIFO= 20200+11160+(100*91)=40460
WA=420*95.71579 = 40201
Ending inventory:
FIFO=55*101=5555
LIFO=55*91=5005
WA=55*95.71579=5264
c)
Income Statement:
	FIFO	LIFO	WA
Sales	80220	80220	80220		420*191
Less:COGS	39910	40460	40201
Gross Profit	40310	39760	40019
Less:Expenses, salary	15100	15100	15100
IBT	25210	24660	24919
Less : Income Tax@40%	10084	9864	9968
Net Income	15126	14796	14951
Balance Sheet:
Assets
Cash	42576	42796	42692		18900+80220-31360-15100-10084
Inventory	5555	5005	5264
Total Assets	48131	47801	47956
Liabilities
Common Stock	16000	16000	16000
Retained Earnings	32131	31801	31956		17005+15126
Total Liabilities	48131	47801	47956
Cash Flow :
Net Income	15126	14796	14951
add:decrease in Inventory	8550	9100	8841		14105-5555
Net Cash inflow	23676	23896	23792
add: Opening Cash	18900	18900	18900
Closing Cash	42576	42796	42692