Question

The Brick Company had cash sales of $229,400 for Year 1, its first year of operation. On April 2, the company purchased 208 units of inventory at $195 per unit. On September 1, an additional 156 units were purchased for $215 per unit. The company had 36 units on hand at the end of the year. The company's income tax rate is 40 percent. All transactions are cash transactions. Required a. The preceding paragraph describes five accounting events: (1) a sales transaction, (2) the first purchase of inventory, (3) a second purchase of inventory. (4) the recognition of cost of goods sold expense, and (5) the payment of income tax expense. Show the amounts of each event in horizontal statements models like the following ones, assuming first a FIFO and then a LIFO cost flow. b. Compute net income using FIFO. c. Compute net income using LIFO e. Which method, FIFO or LIFO, produced the larger amount of assets on the balance sheet?

Answer 1

a.

THE BRICK COMPANY
Effect of Events on Financial Statements
Panel 1: FIFO Cost Flow
Event No.	Balance Sheet					Income Statement					Cash Flows
	Cash	+	Inventory	=	Retained Earnings	Revenue	-	Expenses	=	Net income
1	229400	+		=	229400	229400	-		=	229400	229400	OA
2	-40560	+	40560	=			-		=		-40560	OA
3	-33540	+	33540	=			-		=		-33540	OA
4		+	-66360	=	-66360		-	66360	=	-66360	0	NA
5	-65216	+		=	-65216		-	65216	=	-65216	-65216	OA
Bal.	90084	+	7740	=	97824	229400	-	131576	=	97824	90084	NC
Panel 2: LIFO Cost Flow
1	229400	+		=	229400	229400	-		=	229400	229400	OA
2	-40560	+	40560	=			-		=		-40560	OA
3	-33540	+	33540	=			-		=		-33540	OA
4		+	-67080	=	-67080		-	67080	=	-67080	0	NA
5	-64928	+		=	-64928		-	64928	=	-64928	-64928	OA
Bal.	90372	+	7020	=	97392	229400	-	132008	=	97392	90372	NC

Working:

Sales units = 208 + 156 - 36 = 328

Cost of goods sold:

FIFO: (208 x $195) + (120 x $215) = $66360

LIFO: (156 x $215) + (172 x $195) = $67080

b. Net income assuming FIFO cost flow: $97824

Sales revenue	229400
Cost of goods sold	66360
Gross profit	163040
Income tax expense (40% x $163040)	65216
Net income	97824

c. Net income assuming LIFO cost flow: $97392

Sales revenue	229400
Cost of goods sold	67080
Gross profit	162320
Income tax expense (40% x $162320)	64928
Net income	97392

e. FIFO method produced the larger amount of assets on the balance sheet.