Question

The accounting records of Wall's China Shop reflected the following balances as of January 1, Year 2: Cash Beginning inventory Common stock Retained earnings $17,900 18,060 (210 units @ $86) 14,700 21,260 The following five transactions occurred in Year 2: 1. First purchase (cash) 120 units @ $88 2. Second purchase (cash) 195 units @ $96 3. Sales (all cash) 360 units @ $190 4. Paid $16,900 cash for salaries expense 5. 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. b. Use a vertical model to show the Year 2 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.) Complete this question by entering your answers in the tabs below.

Answer 1

omputation of cost of goods sold and ending inventory:

	Cost of goods sold	Ending inventory
FIFO	$31500 (210*86 + 120*88 + 30*96)	$15840 (165*96)
LIFO	33,150 (195*96 + 120*88 +45 *86)	14,190 (165*86)
Weighted Average	32,462 360 * (210*86 + 120*88 + 195*96)/210+120+195	14,880 (rond off) 165 * 90.17
Ending inventory(units) = 525 - 360 = 165 Weighted average cost per unit = (210*86 + 120*88 + 195*96)/210+120+195 = $90.17 (Rounded off)

WALL'S CHINA SHOP

Computation of income tax expense and net income

	FIFO	LIFO	Weighted Average
Income before tax * (A)	20000	18350	19040
Income tax expense @ 40% (B)	-5000	-4588	-4760
Net income (A) - (B)	$15,000	$13,762	$14,280
* Income before tax = Sales - Cost of goods sold - Salaries expense

b

WALL'S CHINA SHOP Income Statements
	FIFO	LIFO	Weighted Average
Sales (360 * $190)	$68,400	$68,400	$68,400
Cost of goods sold	- 31500	- 33,150	- 32,462
Gross Profit	36,900	35250	35940
Salaries expense	- 16,900	- 16,900	- 16,900
Income before tax	20000	18350	19040
Income tax expense @ 25%	- 5,000	- 4,588	- 4,760
Net income	$15,000	$13,762	$14,280

WALL'S CHINA SHOP Balance Sheet As of December 31 ,Year 2
	FIFO	LIFO	Weighted Average
Assets
Cash *	35120	35532	35360
Inventory	15840	14190	14880
Total Assets	50960	49722	50240
Stockholder's equity
Common stock	14,700	14,700	14,700
Retained earnings **	36260	35022	35540
Total stockholder's equity	50960	49722	50240

Working notes:

* Cash = Beginning balance + sales - purchases - salaries expenses - income tax expenses

** Retained earnings = Beginning balance + Net income

WALL'S CHINA SHOP Statement of Cash Flow For Year Ended December 31, Year 2
	FIFO	LIFO	Weighted Average
Cash flow from operating activities
Cash receipts from customer	$68,400	$68,400	$68,400
Cash paid to supplier	- 29,280	- 29,280	- 29,280 (195*96+120*88)
Cash paid to employees (salary)	- 16,900	- 16,900	-16,900
Cash paid for income tax expense	- 5,000	- 4,588	- 4,760
Net cash flow from operating activities	17220	17632	17460
Cash flow from investing activities	0	0	0
Cash flow from financing activities	0	0	0
Net change in cash	17220	17632	17460
Beginning cash balance	17900	17900	17900
Ending cash balance	$35,120	$35,532	$35,360