Question

e7-6 analyzing and interpreting the financial statement effects of periodic fifo, lifo, and weighted average cost

LO 7-3 an e') weighted average cost methods. E7-6 Analyzing and Interpreting the Financial Statement Effects of Periodic FIFO, LIFO, and Weighted Average Cost Onion Iron Corp. tracks the number of units purchased and sold throughout each year but applies its inventory costing method at the end of the year, as if it uses a periodic inventory system. Assum its accounting records provided the following information at the end of the annual accounting period, December 31. Transactions Units Unit Cost $12 a. Inventory, Beginning For the year: b. Purchase, April 11 c. Purchase, June 1 d. Sale, May 1 (sold for $40 per unit) e. Sale, July 3 (sold for $40 per unit) 1. Operating expenses (excluding income tax expense). $19,500 Required: 1. Calculate the number and cost of goods available for sale. 2. Calculate the number of units in ending inventory. 3. Compute the cost of ending inventory and cost of goods sold under (a) FIFO. (b) LIFO. and (c) weighted average cost. 4. Prepare an Income Statement that shows the FIFO method in one column, the LIFO method in another column, and the weighted average method in a final column. Include the follow- ing line items in the income statement: Sales, Cost of Goods Sold, Gross Profit, Operating Expenses, and Income from Operations. 5. Compare the Income from Operations and the ending inventory amounts that would be reported under the three methods. Explain the similarities and differences. 6. Which inventory costing method minimizes income taxes?

Answer 1

Answer is given below

Cost of goods available for sale Date Rate Units 300 900 800 $12 April 1 June 1 Opening balance First Purchase Second Purchase Cost of goods available for sale $10 Total $3,600 $9,000 $10,400 $23,000 $13 2,000 May 1 June 3 Cost of goods available for sale Less: Sales Sales Closing inventory in units 300 600 1,100 Weighted FIFO LIFO Cost of Goods sold Ending Inventory $9,600 $13,400 $11,400 $11,600 Average $10,350 $12,650 LIFO Orion Iron Corp. Income Statement For the Year ended December 31 Weighted FIFO Average Sales $36,000 $36,000 $36,000 Cost of Goods Sold $9,600 $11,400 $10,350 Gross profit $26,400 $24,600 $25,650 Operating expenses $19,500 $19,500 $19,500 Income from Operations $6,900 $5,100 $6,150 Sales May 1 Selling Units Total Sales price $401 $12,000 6001 $40 $24,000 $36,000 300) July 3 Total Sales FIFO LIFO Weighted Income from Operations Ending Inventory $6,900 $13,400 $5,100 $11,600 Average $6,150 $12,650 FIFO values the inventory at the latest price. Since price is increasing the ending inventory is valued at higher price LIFO values the inventory at the earlier price. Since earlier prices were lower the ending inventory is valued at lower price Weighted average values the inventory at weighted average price hence inventory balance is between FIFO and LIFO LIFO reduces the tax liability due to lower income from Operations FIFO Issue Rate Closing balance Total Units Rate Balance Date Units Units Purchase Rate $12 $10 300 900 Total $3,600 $9,000 $10,400 Opening balance First Purchase Second Purchase Sale 800 April 1 June 1 May 1 June 3 $13 300 600 $12 $10 $3,600 $6,000 300 $10.00 $3,000 800 $13.00 $10,400 1,100 $13,400 Total issue $9,600 Opening stock Add: Purchase $3,600 $19,400 $23,000 $13,400 $9,600 Less: Closing stock Cost of Goods sold LIFO Purchase Rate Issue Rate Closing balance Total Units Rate Balance Date Units Units 300 900 800 $12 $10 Opening balance First Purchase Second Purchase Sale Total $3,600 $9,000 $10,400 April 1 June 1 May 1 June 3 $13 800 100 $13 $10 10,400 1,000 300 800 1,100 $11,400 $12 $10 $3,600 $8,000 $11,600 Total issue Opening stock Add: Purchase $3,600 $19,400 $23,000 $11,600 $11,400 Less: Closing stock Cost of Goods sold Weighted average cost Issue Rate Closing balance Total Units Rate Balance Date Units Units 300 900 800 Opening balance First Purchase Second Purchase Sale Purchase Rate $12 $10 $13 Total $3,600 $9,000 $10,400 April 1 June 1 2,000 $11.50 $23,000 900 11.50 $10,350 1,100 $11.50 $12,650 1,100 $12,650 Total issue $10,350 Opening stock Add: Purchase $3,600 $19,400 $23,000 $12,650 $10,350 Less: Closing stock Cost of Goods sold