Question

The Brick Company had cash sales of $222,400 for Year 1, its first year of operation. On April 2, the company purchased 206 units of inventory at $170 per unit. On September 1, an additional 155 units were purchased for $187 per unit. The company had 43 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

Answer-

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	222,400	+		=	222,400	222,400	-		=	222,400	222,400	OA
2	-35,020 (206*170)	+	35,020	=			-		=		-35,020	OA
3	-29,985 (155*187)	+	29,985	=			-		=		-29,985	OA
4		+	-55,964	=	-55,964		-	55,964	=	-55,964	0	NA
5	-66,574	+		=	-66,574		-	66,574	=	-66,574	-66,574	OA
Bal.	90,821	+	9,041	=	99,862	222,400	-	122,538	=	99,862	90,821	NC
Panel 2: LIFO Cost Flow
1	222,400	+		=	222,400	222,400	-		=	222,400	222,400	OA
2	-35,020	+	35,020	=			-		=		-35,020	OA
3	-29,985	+	29,985	=			-		=		-29,985	OA
4		+	-56,695	=	-56,695		-	56,695	=	-56,695	0	NA
5	-66,282	+		=	-66,282		-	66,282	=	-66,282	-66,282	OA
Bal.	91,113	+	8,310	=	99,423	222,400	-	122,977	=	99,423	91,113	NC

Working:

Sales units = 206 + 155 - 43 = 318

Cost of goods sold:

FIFO: (206 x $170) + (112 x $187) = $55,964

LIFO: (155 x $187) + (163 x $170) = $56,695

b. Net income assuming FIFO cost flow: $99,862

Sales revenue	222,400
Cost of goods sold	55,964
Gross profit	166,436
Income tax expense (40% x $166,436)	66,574
Net income	99,862

c. Net income assuming LIFO cost flow: $99,423

Sales revenue	222,400
Cost of goods sold	56,695
Gross profit	165,705
Income tax expense (40% x $165,705)	66,282
Net income	99,423

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