Question

Demonstration Problem 5-5 Demonstration Problem 5-5 introduces accounting for inventories with multiple layers and prices. The objective here is to show how cost flow methods differ from each other. For example, does FIFO or LIFO produce a higher gross margin? We want to see how different cost flow methods affect a particular statement (e.g., what does the income statement look like under FIFO, LIFO, and weighted average?). We, demonstration Problem 5-5 use a vertical format to prepare income statements, balance sheets, and statements of cash flows, Review the information and solutions and notice the following comparisons: A. Notice that the cost flow method does not affect revenue. B. Have the students verify that the amount of cost of goods sold plus ending inventory is equal to the amount of cost of goods available for sale. In other words, the total product cost is the same for all cost flow methods. The difference lies in how the cost is allocated between cost of goods sold and ending inventory. C. With the exception of tax consequences, cash flow is not affected by the cost flow method. Demonstration Problem 5-5: Inventory Cost Flow Assumptions Crystal Apple Sales Company began 2018 with cash of $2,000, inventory of $3,600 (200 crystal apples that cost $18 each), $2,500 of common stock, and $3,100 of retained earnings. The following events occurred during 2018. 1. Crystal Apple purchased additional inventory twice during 2018. The first purchase consisted of 800 apples that cost $20 each, and the second consisted of 1,200 apples that cost $24 each. The purchases were on account. 2. The company sold 2,040 apples for cash at a selling price of $40 each. 3. The company paid $44,800 cash on accounts payable for inventory purchases. 4. Crystal Apple paid $26,000 cash for operating expenses. 5. Assume an income tax rate of 30 percent. Crystal Apple paid income tax expense in cash Required a. Determine the ending inventory and cost of goods sold using the three different cost flow assumptions: FIFO, LIFO, and Weighted Average. b. Prepare an income statement, a balance sheet, and a statement of cash flows under each of the three cost flow assumptions.

Answer 1

FIFO Method:-

uit apate Particules furchases Sales balance unit Cost Total cost aut Cost Total Unit uit total Opening bal. (2008 ) -- - - - 200 18 3600 Marchalls 800 20 16000 200 18 3 600 800 20 16000 Ilwichass 1200 24 28,500 200 18 3600 800 20 16 000 1200 24 28,800 2040 40 81,600 160 24 3840 sales

ENDING INVENTORY= 160*24=3840

cost of goods sold = opening + purchses- Closing stock

= 3600 + 44800 -3840= 44560

LIFO METHOD
LITO METHOD Particulars Purchases Salu vuit vul Total lost out bunt op. Bal. furchases too 20 16000 balance & Total Our Coit Total 200 18 3600 200 18 3600 50 20 16000 200 18 3600 500 20 16000 1200 24 assoo 86, 600 160 18 2880 Purchases 1200 Q4 28,500 Sales 2040 40

ENDING INVENTORY= 160*18=2880

cost of goods sold = opening + purchses- Closing stock

= 3600 + 44800-2880=45520

WEIGHTED AVERAGE METHOD:-

weighted Average Method. Date Particulars Purchases Sales Balance Unitat Total Cost Unit out lost Total chis o Total. Opening Bul - - 200 18 3600 Purchases, 800 20 16000 1000 19.6 19600 d Purchases 1800 24 28,500 2200 29.0048.400 2040 22 44,880 160 22 300 - Sales

ENDING INVENTORY= 160*22=3520

cost of goods sold = opening + purchases- Closing stock

= 3600 + 44800 - 3520

=44880

INCOME STATEMENT:-

Particulars Amount $ Particulars Amount $

To Opening stock 3600 By sales 81600

To Purchases 44800 By Closing Stock 33200

To Operating expenses 26000

To Income Tax (40400*30%) 12120

To Net Profit 28280

Balance sheet

Liabilities	Amount $	Assets	Amount $
Common Stock 2500 add:- net profit 28280	30780	Cash	680
Retained Earnings	3100	Inventory	33200

Total Liabilities	33880	Total Assets	33880

Cash Flow Statement:-

Particulars Amount $

Retained Earnings 3100

Add:- Operating Expenses 26000

less- increases in inventory (29600)

Add:- reduced bills payable 44800

cash or cash equivalent 44300

less :- tax (12120)

32180