Question

Exercise 6-7 Income statement effects of alternative cost flow assumptions to3 Use the data in Exercises 6-5 and 66 to construct comparative Income statements for Car Armour (year end De cember 31, 2020). similar to those shown in Exhibit 6.8 in the chapter. Assume that operating expenses are $1,250. 1. Which method results in the highest profit 2. Il costs were rising instead of falling, which method would result in the highest profit?

Answer 1

6-5

	FIFO	Cost of goods available for sale			Cost of Goods Sold			Ending Balance
Date	Activity	Units	Unit Price	Amount	Units	Unit Price	Amount	Units	Unit Price	Amount
Jan-01	Beginning Inventory	110	$             7.00	$    770.00				110	$           7.00	$          770.00
Jan-10	Sales				80	$                  7.00	$                 560.00	30	$           7.00	$          210.00
Mar-07	Purchase	300	$             6.30	$1,890.00				30	$           7.00	$          210.00
								300	$           6.30	$       1,890.00
Mar-15	Sales				30	$                  7.00	$                 210.00
					100	$                  6.30	$                 630.00	200	$           6.30	$       1,260.00
Jul-28	Purchase	550	$             6.10	$3,355.00				200	$           6.30	$       1,260.00
								550	$           6.10	$       3,355.00
Oct-03	Purchase	500	$             6.00	$3,000.00				200	$           6.30	$       1,260.00
								550	$           6.10	$       3,355.00
								500	$           6.00	$       3,000.00
Oct-05	Sales				200	$                  6.30	$              1,260.00	80	$           6.10	$          488.00
					470	$                  6.10	$              2,867.00	500	$           6.00	$       3,000.00
	Total	1460		$9,015.00	880		$             5,527.00	580		$      3,488.00

6-6

	W. Avg	Cost of goods available for sale			Cost of Goods Sold			Ending Balance
Date	Activity	Units	Unit Price	Amount	Units	Unit Price	Amount	Units	Unit Price	Amount
Jan-01	Beginning Inventory	110	$             7.00	$    770.00				110	$           7.00	$                770
Jan-10	Sales				80	$                  7.00	$                       560	30	$           7.00	$                210
Mar-07	Purchase	300	$             6.30	$1,890.00				30	$           7.00	$                210
								300	$           6.30	$            1,890
								330	$           6.36	$            2,100
Mar-15	Sales				130	$                  6.36	$                       827	200	$           6.37	$            1,273
Jul-28	Purchase	550	$             6.10	$3,355.00				200	$           6.37	$            1,273
								550	$           6.10	$            3,355
Oct-03	Purchase	500	$             6.00	$3,000.00				200	$           6.37	$            1,273
								550	$           6.10	$            3,355
								500	$           6.00	$            3,000
								1250	$           6.10	$            7,628
Oct-05	Sales				670	$                  6.10	$                   4,089	580	$           6.10	$            3,539
	Total	1460		$9,015.00	880		$                   5,476	580		$            3,539

Check figure given for this is wrong.

6-7

	FIFO	W.Avg	Sp. ID
Sales Revenue	$          13,640	$        13,640	$    13,640
Cost of Goods Sold	$            5,527	$           5,476	$      5,426
Gross Profit	$            8,113	$          8,164	$      8,214
Operating Expenses	$            1,250	$           1,250	$      1,250
Net Income	$            6,863	$          6,914	$      6,964

a. Specific Identification method, results in highest profit

b. If costs have been rising, then FIFO would have given highes profit