Question

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Laker Company reported the following January purchases and sales data for its only product.

Date			Activities	Units Acquired at Cost								Units sold at Retail
Jan.	1		Beginning inventory	240	units	@	$	16.50	=	$	3,960
Jan.	10		Sales										190	units	@	$	25.50
Jan.	20		Purchase	170	units	@	$	15.50	=		2,635
Jan.	25		Sales										190	units	@	$	25.50
Jan.	30		Purchase	380	units	@	$	15.00	=		5,700
			Totals	790	units					$	12,295		380	units

The Company uses a perpetual inventory system. For specific identification, ending inventory consists of 410 units, where 380 are from the January 30 purchase, 5 are from the January 20 purchase, and 25 are from beginning inventory.

rev: 03_14_2019_QC_CS-162819

Exercise 5-4 Perpetual: Income effects of inventory methods LO A1

Required:

1. Complete comparative income statements for the month of January for Laker Company for the four inventory methods. Assume expenses are $2,250, and that the applicable income tax rate is 40%. (Round your Intermediate calculations to 2 decimal places.)

2. Which method yields the highest net income?

• Specific identification

• Weighted average

• LIFO

• FIFO

3. Does net income using weighted average fall between that using FIFO and LIFO?

• No

• Yes

4. If costs were rising instead of falling, which method would yield the highest net income?

• LIFO

• FIFO

• Specific identification

• Weighted average

rev: 03_14_2019_QC_CS-162819

Answer 1

Solution 1:

Computation of ending inventory COGS under FIFO - Laker Company
Date	Beginning Inventory			Purchase			Cost of Goods Sold			Ending Inventory
	Qty	Rate	Amount	Qty	Rate	Amount	Qty	Rate	Amount	Qty	Rate	Amount
1-Jan	240	$16.50	$3,960.00	0	$0.00	$0.00	0	$0.00	$0.00	240	$16.50	$3,960.00
10-Jan	240	$16.50	$3,960.00	0	$0.00	$0.00	190	$16.50	$3,135.00	50	$16.50	$825.00
20-Jan	50	$16.50	$825.00	170	$15.50	$2,635.00	0	$0.00	$0.00	50	$16.50	$825.00
										170	$15.50	$2,635.00
25-Jan	50	$16.50	$825.00	0	$0.00	$0.00	50	$16.50	$825.00	30	$15.50	$465.00
	170	$15.50	$2,635.00				140	$15.50	$2,170.00
30-Jan	30	$15.50	$465.00	380	$15.00	$5,700.00	0	$0.00	$0.00	30	$15.50	$465.00
										380	$15.00	$5,700.00
Total							380		$6,130.00	410		$6,165.00

Computation of ending inventory COGS under LIFO - Laker Company
Date	Beginning Inventory			Purchase			Cost of Goods Sold			Ending Inventory
	Qty	Rate	Amount	Qty	Rate	Amount	Qty	Rate	Amount	Qty	Rate	Amount
1-Jan	240	$16.50	$3,960.00	0	$0.00	$0.00	0	$0.00	$0.00	240	$16.50	$3,960.00
10-Jan	240	$16.50	$3,960.00	0	$0.00	$0.00	190	$16.50	$3,135.00	50	$16.50	$825.00
20-Jan	50	$16.50	$825.00	170	$15.50	$2,635.00	0	$0.00	$0.00	50	$16.50	$825.00
										170	$15.50	$2,635.00
25-Jan	50	$16.50	$825.00	0	$0.00	$0.00	170	$15.50	$2,635.00	30	$16.50	$495.00
	170	$15.50	$2,635.00				20	$16.50	$330.00
30-Jan	30	$16.50	$495.00	380	$15.00	$5,700.00	0	$0.00	$0.00	30	$16.50	$495.00
										380	$15.00	$5,700.00
Total							380		$6,100.00	410		$6,195.00

Computation of ending inventory COGS under Weighted Average Cost - Laker Company
Date	Beginning Inventory			Purchase			Cost of Goods Sold			Ending Inventory
	Qty	Rate	Amount	Qty	Rate	Amount	Qty	Rate	Amount	Qty	Rate	Amount
1-Jan	240	$16.50	$3,960	0	$0.00	$0	0	$0.00	$0	240	$16.50	$3,960
10-Jan	240	$16.50	$3,960	0	$0.00	$0	190	$16.50	$3,135	50	$16.50	$825
20-Jan	50	$16.50	$825	170	$15.50	$2,635	0	$0.00	$0	220	$15.73	$3,460
25-Jan	220	$15.73	$3,460	0	$0.00	$0	190	$15.73	$2,988	30	$15.73	$472
25-Mar	30	$15.73	$472	380	$15.00	$5,700	0	$0.00	$0	410	$15.05	$6,172
Total							380		$6,123	410		$6,172

Computation of COGS and ending inventory - Specific identification
Particulars	Cost of goods available for sale			Cost of goods sold			Ending Inventory
	Nos of units	Unit Cost	Cost of goods available for sale	Nos of units sold	Unit Cost	Cost of goods sold	Nos of units in ending inventory	Unit Cost	Ending inventory
Beginning inventory	240	$16.50	$3,960	215	$16.50	$3,547.50	25	$16.50	$412.50
Purchases:
20-Jan	170	$15.50	$2,635	165	$15.50	$2,557.50	5	$15.50	$77.50
30-Jan	380	$15.00	$5,700	0	$15.00	$0.00	380	$15.00	$5,700.00
Total	790		$12,295	380		$6,105.00	410		$6,190.00

Income Statement - Laker Company
Particulars	Specific identification	Weighted Average	FIFO	LIFO
Sales	$9,690	$9,690	$9,690	$9,690
Cost of goods sold	$6,105	$6,123	$6,130	$6,100
Gross Profit (Sales - COGS)	$3,585	$3,567	$3,560	$3,590
Expenses	$2,250	$2,250	$2,250	$2,250
Income before taxes	$1,335	$1,317	$1,310	$1,340
Income tax expense (40%)	$534	$527	$524	$536
Net Income	$801	$790	$786	$804

Solution 2:

LIFO method yields the highest net income

Solution 3:

Yes, net income using weighted average fall between that using FIFO and LIFO

Solution 4:

If costs were rising instead of falling, FIFO method would yield the highest net income