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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	225	units	@	$	15.00	=	$	3,375
Jan.	10		Sales										175	units	@	$	24.00
Jan.	20		Purchase	180	units	@	$	14.00	=		2,520
Jan.	25		Sales										210	units	@	$	24.00
Jan.	30		Purchase	350	units	@	$	13.50	=		4,725
			Totals	755	units					$	10,620		385	units

The Company uses a perpetual inventory system. For specific identification, ending inventory consists of 370 units, where 350 are from the January 30 purchase, 5 are from the January 20 purchase, and 15 are from beginning inventory.

Required:
1. Complete comparative income statements for the month of January for Laker Company for the four inventory methods. Assume expenses are $2,100 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?

• LIFO

• Weighted average

• FIFO

• Specific identification

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?

• Specific identification

• FIFO

• Weighted average

• LIFO

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Answer 1

Answer 1) Income statement under different methods LIFO Sales Less: Cost of Goods sold Gross Profit Less: Operating Expenses Income Before tax Income tax @ 40% Net Income 9,240.00 5,595.00 3,645.00 2,100.00 1,545.00 555.00 990.00 Weighted Average 9,240.00 5,610.65 3,629.35 2,100.00 1,529.35 570.65 958.70 FIFO 9,240.00 5,615.00 3,625.00 2,100.00 1,525.00 575.00 950.00 Specific Identification 9,240.00 5,600.00 3,640.00 2,100.00 1,540.00 560.00 980.00

Working Notes: Calculation of cost of goods sold under LIFO Method perpetual inventory system Purchase Cost of goods sold Balance Inventory Cost per Unit (In $) Total Cost (In $) Cost per Total Cost Unit (In $)(In $) Quantity Date Quantity Quantity 225 Jan'1 Jan'10 Cost per Unit (In $) 15.00 15.00 15.00 14.00 175 15.00 2,625.00 50 Total Cost (In $) 3,375.00 750.00 750.00 2,520.00 300.00 Jan'20 180 14.00 2,520.00 50 180 Jan 25 180 14.00 20 15.00 2,520.00 450.00 30 15.00 Jan 30 350 13.50 4,725.00 20 350 15.00 13.50 300.00 4,725.00 5,025.00 Total 530 7,245.00 385 5,595.00 370

Calculation of cost of goods sold under Weighted Average Method perpetual inventory system Purchase Cost of goods sold Balance Inventory Cost per Unit (In $) Quantity Total Cost (In $) Cost per Total Cost Unit (In $) (In $) Quantity Quantity 225 Date Jan'1 Jan'10 Jan 20 175 15.00 2,625.00 50 180 14.00 2,520.00 50 180 Cost per Total Cost Unit (In $) (In $) 15.00 3,375.00 15.00 750.00 15.00 750.00 14.00 2,520.00 14.22 3,270.00 14.22 284.35 14.22 284.35 13.50 4,725.00 5,009.35 230 20 210 14.22 2,985.65 Jan 25 Jan'30 350 13.50 4,725.00 20 350 Total 530 7,245.00 385 5,610.65 370

Calculation of cost of goods sold under FIFO Method perpetual inventory system Purchase Cost of goods sold Balance Inventory Cost per Unit (In $) Total Cost (In $) Cost per Total Cost Unit (In $) (In $) Quantity Quantity Date Jan'1 Jan'10 Jan 20 Quantity 225 50 175 15.00 2,625.00 Cost per Total Cost Unit (In $) (In $) 15.00 3,375.00 15.00 750.00 15.00 750.00 14.00 2,520.00 14.00 280.00 180 14.00 2,520.00 50 180 Jan 25 50 20 15.00 14.00 750.00 2,240.00 160 Jan 30 350 13.50 4,725.00 20 350 14.00 13.50 280.00 4,725.00 5,005.00 Total 530 7,245.00 385 5,615.00 370

Calculation of cost of goods sold under Specific Identification Method perpetual inventory system Purchase Cost of goods sold Balance Inventory Cost per Unit (In $) Total Cost (In $) Cost per Total Cost Unit (In $) (In $) Quantity Quantity Quantity Cost per Unit (In $) 15.00 15.00 Date Jan'1 Jan'10 Jan'20 225 175 15.00 2,625.00 50 Total Cost (In $) 3,375.00 750.00 750.00 2,520.00 180 14.00 2,520.00 50 180 15.00 14.00 Jan 25 35 15.00 14.00 525.00 2,450.00 175 Jan'30 350 13.50 4,725.00 15 15.00 14.00 225.00 70.00 5 350 13.50 4,725.00 5,020.00 Total 530 7,245.00 385 5,600.00 370

Answer 2) As is evident from the perusal of above income statement LIFO Method yields the highest Net Income (i.e. $ 990). Answer 3) Yes, Net Income using weighted average method (i.e. $ 958.70) falls between FIFO Method (i.e. $ 950) and LIFO Method (i.e. $ 990). Answer 4) if costs were rising, then FIFO Method would yield the highest Net Income. It is because in the case of rising costs, FIFO method which includes earliest inventory (and moving forwards) in the cost of goods sold would have the lowest cost of goods sold and consequently the highest gross profit and net income.