Problem

Effect of different inventory cost flow methods on financial statementsThe accounting reco...

Effect of different inventory cost flow methods on financial statements

The accounting records of Clear Photography, Inc., reflected the following balances as of January 1, 2011:

Cash

$18,000

Beginning inventory

13,500 (150 units @ $90)

Common stock

15,000

Retained earnings

16,500

The following five transactions occurred in 2011:

1. First purchase (cash) 120 units @ $92

2. Second purchase (cash) 200 units @ $100

3. Sales (all cash) 300 units @ $185

4. Paid $15,000 cash for operating expenses.

5. Paid cash for income tax at the rate of 40 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. Compute income tax expense for each method.


b. Record the above transactions in general journal form and post to T-accounts assuming (1) FIFO cost flow. (2) LIFO cost flow, and (3) weighted-average cost flow.


c. Use a vertical model to show the 2011 income statement, balance sheet, and statement of cash flows under FIFO, LIFO, and weighted average.

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