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 $19,900 18,490 (215 units @ $86) 14,300 24,090 The following five transactions occurred in Year 2: 1. First purchase (cash) 115 units @ $88 2. Second purchase (cash) 200 units @ $96 3. Sales (all cash) 360 units @ $199 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.)

Answer 1

Inventory Card By FIFO Method Purchases Sales Balance Units Cost Amount Units Cost COGS Units Cost Amount 215 115 115 $88 $96 $10,120 $19,200 $86 $88 $96 $18,490 $10,120 $19,200 200 200 215 115 $86 $88 $96 $18,490 $10,120 $2,880 $31,490 30 $96 170 170 $16,320 $16,320 Inventory Card By LIFO Method Purchases Sales Units Cost Amount Units Cost COGS Units 215 115 Balance Cost $86 $88 $96 Amount $18,490 $10,120 $19,200 115 $88 $10,120 $19,200 200 $96 200 200 115 $96 $88 $86 $19,200 $10,120 $3,870 $33,190 45 170 $86 $14,620 $14,620 170 Inventory Card By Weighted Average Cost Method Purchases Sales Units Cost Amount Units Cost COGS Units 215 Balance Cost $86 $88 $96 Amount $18,490 $10,120 $19,200 WAC* $86.00 $86.70 $90.21 115 $88 115 $10,120 $19,200 200 $96 200 360 $90.21 $32,475 170 $90.21 $90.21 $15,335 $15,335 $32,475 170

FIFO LIFO Weighted Average $32,475 $15,335 Cost of goods sold Ending Inventory $31,490 $16,320 $33,190 $14,620 WALL'S CHINA SHOP Income Statements For the Year Ended December 31, Year 2 FIFO LIFO Sales* (-)Cost of goods Sold Gross Profit Salaries Expense Income Before Tax (-) Income Tax Net Income $71,640 $31,490 $40,150 $16,900 $23,250 $5,813 $17,438 $71,640 $33,190 $38,450 $ 16,900 $21,550 $5,388 $16,163 Weighted Average $71,640 $32,475 $39,165 $16,900 $22,265 $5,566 $16,699 Sale Value = 360 x 199 $71,640 WALL'S CHINA SHOP Balance Sheet As on December 31, Year 2 FIFO LIFO Weighted Average Assets Cash $39,932 $39,754 Inventory $39,508 $16,320 $55,828 $14,620 $15,335 $55,089 Total assets $54,552 Equity & Liaabilities Common Stock $14,300 Retained Earnings $14,300 $24,090 $17,438 $24,090 $14,300 $24,090 $16,699 Current Year Earnings $16,162 Total Equity $55,828 $54,552 $55,089

WALL'S CHINA SHOP Statement of Cashflows For the Year Ended December 31, Year 2 FIFO LIFO Weighted Average Cash Flows from Operating Activities Collections Payments to Suppliers Payments to Employees Insurance Payments Interest Payments Other Source/(Uses) of Cash(Income Tax) Net Cash from Operating Activities Cash Flows from Investing Activities Increase in Marketable Securities Sale of Fixed Assets $71,640 $29,320 $16,900 $0 $0 $5,812 $19,608 $71,640 $29,320 $16,900 $0 $0 $5,387 $20,033 $71,640 $29,320 $16,900 $0 $0 $5,566 $19,854 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Purchase of New Equipment Other Net Cash Used for Investing Activities Cash Flows from Financing Activities Payment of Mortgage Principal Transfer From/(To) Parent Other $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Net Cash from Financing Activities NET INCREASE/(DECREASE) IN CASH CASH, BEGINNING OF YEAR CASH, END OF YEAR $19,608 $19,900 $39,508 $20,033 $19,900 $39,933 $19,854 $19,900 $39,754