Question

The accounting records of Wall’s China Shop reflected the following balances as of January 1, Year 3: Cash $ 18,000 Beginning inventory 17,835 (205 @ $87) Common stock 14,500 Retained earnings 21,335 The following five transactions occurred in Year 3: First purchase (cash): 125 units @ $89 Second purchase (cash): 195 units @ $97 Sales (all cash): 360 units @ $191 Paid $13,800 cash for salaries expense Paid cash for income tax at the rate of 25 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. Use a vertical model to show the Year 3 income statement, balance sheet, and statement of cash flows under FIFO, LIFO, and weighted average. (Hint: Record the events under an accounting equation before preparing the statements.)

Answer 1

Total inventory available = 47875
Average cost of inventory = 47875/525 = 91.19
Closing inventory (525-360=165 units):
FIFO = 165*97 = 16005
LIFO = 165*87 = 14355
WA = 165 * 91.19 = 15046
COGS:
FIFO = 47875 - 16005 = 31870
LIFO = 47875 - 14355 = 33520
WA = 47875 - 15046 = 32829
Accounting Equations:
FIFO:
	Cash	inven	=	CS	RE
	18000	17835	=	14500	21335
Purchases	-11125	11125	=
Purchases	-18915	18915	=
Sales	68760		=		68760
COGS		-31870	=		-31870
Salaries paid	-13800		=		-13800
Income tax paid	-5772.5		=		-5772.5
Balance	37147.5	16005	=	14500	38652.5
LIFO:
	Cash	inven	=	CS	RE
	18000	17835	=	14500	21335
Purchases	-11125	11125	=
Purchases	-18915	18915	=
Sales	68760		=		68760
COGS		-33520	=		-33520
Salaries paid	-13800		=		-13800
Income tax paid	-5360		=		-5360
Balance	37560	14355	=	14500	37415
WAM:
	Cash	inven	=	CS	RE
	18000	17835	=	14500	21335
Purchases	-11125	11125	=
Purchases	-18915	18915	=
Sales	68760		=		68760
COGS		-32829	=		-32829
Salaries paid	-13800		=		-13800
Income tax paid	-5532.75		=		-5532.75
Balance	37387.25	15046	=	14500	37933.25

Income Statement:
	FIFO	LIFO	WAM
Sales	68760	68760	68760
Less:COGS	-31870	-33520	-32829
Gross profit	36890	35240	35931
Salaries paid	-13800	-13800	-13800
Income before tax	23090	21440	22131
Less: Tax	5772.5	5360	5532.75
Net Income	17317.5	16080	16598.25
Balance Sheet:
Assets:	FIFO	LIFO	WAM
Cash	37147.5	37560	37387.25
Inventory	16005	14355	15046
Total Assets	53152.5	51915	52433.25
Liabilities:
Com Stock	14500	14500	14500
Ret. Earnings	38652.5	37415	37933.25
total Liabilities	53152.5	51915	52433.25
Cash Flow Statement:
	FIFO	LIFO	WAM
Cash Op Balance	18000	18000	18000
Purchases	-11125	-11125	-11125
Purchases	-18915	-18915	-18915
Sales	68760	68760	68760
Salaries paid	-13800	-13800	-13800
Income tax paid	-5772.5	-5360	-5532.75
Cash Cl Balance	37147.5	37560	37387.25