Survey Of Accounting
Survey Of Accounting
4th Edition
ISBN: 9780077862374
Author: Edmonds, Thomas P.
Publisher: Mcgraw-hill Education,
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Chapter 5, Problem 21E

a.

To determine

Prepare income statement using FIFO and LIFO.

a.

Expert Solution
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Explanation of Solution

Income statement:  The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Prepare income statement using FIFO as follows:

Company W
Income Statements (FIFO)
For the Year Ended December 31, XXXX
ParticularsAmount
Sales revenue (1)$175,000
Less: Cost of Goods Sold Table (2)($104,300)
Gross Margin$70,700
Less: Operating Expenses($21,000)
Income Before Tax$49,700
Less: Income Tax Expense (3)($14,910)
Net Income$34,790

Table (1)

Working note 1: Calculate the sales revenue.

Sales revenue=(Units of inventory to be sold)×(Sale price per unit)=3,500 units×$50 per unit=$175,000

Working note 2: Calculate cost of goods sold amount under FIFO:

Computation of cost of goods sold
ParticularsUnitUnit costTotal cost
Purchases:   
January 1300$25$7,500
April 12,800$30$84,000
October 1400$32$12,800
Cost of goods sold3,500 $104,300

Table (2)

Working note 3: Calculate income tax expense amount:

Income tax expenses=[salescost of goodssoldoperating expense]×30100=$175,000$104,300$21,000×30100=$49,700×30100=$14,910

Prepare income statement using LIFO as follows:

Company W
Income Statements (LIFO)
For the Year Ended December 31, XXXX
ParticularsAmount
Sales revenue (4)$175,000
Less: Cost of Goods Sold Table (4)($107,000)
Gross Margin$68,000
Less: Operating Expenses($21,000)
Income Before Tax$47,000
Less: Income Tax Expense (6)($14,100)
Net Income$32,900

Table (3)

Working note 4: Calculate the sales revenue.

Sales revenue=(Units of inventory to be sold)×(Sale price per unit)=3,500 units×$50 per unit=$175,000

Working note 5: Calculate cost of goods sold amount under LIFO:

Computation of cost of goods sold
ParticularsUnitUnit costTotal cost
Purchases:   
October 11,000$32$32,000
April 12,500$30$75,000
Cost of goods sold3,500 $107,000

Table (4)

Working note 6: Calculate income tax expense amount:

Income tax expenses=[SalesCost of goodssoldOperating expense]×30100=[$175,000$107,000$21,000]×30100=$47,000×30100=$14,100

b.

To determine

Ascertain the amount of income tax that would be saved by Company W if it changes the cost flow method.

b.

Expert Solution
Check Mark

Explanation of Solution

Income Tax Expenses: The expenses which are related to the taxable income of the individuals and business entities for an accounting period, and are recognized by them for the purpose of federal government and state government tax are called as income tax expenses.

  • The amount of income tax that paid by Company W under FIFO cost method is $14,910.
  • The amount of income tax that paid by Company W under LIFO cost method is $14,100.

The income tax saved by Company W is calculated as follows:

Income tax saved by Company W}=(Tax expense under FIFO method)(Tax expense under LIFO method )=$14,910$14,100=$810

Thus, Company W would save $810 if it changes the cost flow method from FIFO method to LIFO method.

c.

To determine

Ascertain the cash flow from operating activities under FIFO and LIFO.

c.

Expert Solution
Check Mark

Explanation of Solution

Cash flows from operating activities:  This section of cash flow statement provides information about the cash received or cash paid in day-to-day operating activities of a company.

Ascertain the cash flow from operating activities under FIFO and LIFO as follows:

Company W
Cash Flows from Operating Activities
ParticularsFIFOLIFO
Cash Flows From Operating Activities:  
Cash Inflow from Customers$175,000$175,000
Less: Cash Outflow for Inventory (7)($116,000)($116,000)
Cash Outflow for Operating Expense($21,000)($21,000)
Cash Outflow for Income Tax Expense($14,910)($14,100)
Net Cash Flow from Operating Activities$23,090$23,900

Table (5)

Working note 7: Calculate cash outflow for Inventory amount:

Cash paid for inventory=[Purchased made on April 1+Purchased made on october 1]=$84,000+$32,000=$116,000

d.

To determine

Describe why cash flow from operating activities is lower under FIFO when that cost flow method produced the higher gross margin.

d.

Expert Solution
Check Mark

Explanation of Solution

The cash flow from operating activities is lower under FIFO method because more amount of income tax has to be paid on the amount of income before tax reported under FIFO. Thus, more amounts of cash have been expensed for operating activities that lowers the net cash flow from operating activities.

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Chapter 5 Solutions

Survey Of Accounting

Ch. 5 - Prob. 11QCh. 5 - Prob. 12QCh. 5 - Prob. 13QCh. 5 - 14. What is an advantage of using the percent of...Ch. 5 - 15. What is aging of accounts receivable?Ch. 5 - Prob. 16QCh. 5 - Prob. 17QCh. 5 - Prob. 18QCh. 5 - 21. What is accrued interest?Ch. 5 - How does the accrual of interest revenue or...Ch. 5 - Prob. 21QCh. 5 - Prob. 22QCh. 5 - Prob. 23QCh. 5 - Prob. 24QCh. 5 - Prob. 25QCh. 5 - 26. What types of costs do businesses avoid when...Ch. 5 - 1. Name and describe the four cost flow methods...Ch. 5 - 2. What are some advantages and disadvantages of...Ch. 5 - Prob. 29QCh. 5 - Prob. 30QCh. 5 - 5. In an inflationary period, which inventory cost...Ch. 5 - 6. In an inflationary period, which inventory cost...Ch. 5 - 7. What is the difference between the flow of...Ch. 5 - Prob. 34QCh. 5 - Prob. 35QCh. 5 - Prob. 36QCh. 5 - Prob. 37QCh. 5 - Prob. 38QCh. 5 - Prob. 39QCh. 5 - Prob. 1ECh. 5 - Exercise 7-1A Analysis of financial statement...Ch. 5 - Prob. 3ECh. 5 - Prob. 4ECh. 5 - Prob. 5ECh. 5 - Effect of recovering a receivable previously...Ch. 5 - Prob. 7ECh. 5 - Prob. 8ECh. 5 - Prob. 9ECh. 5 - Prob. 10ECh. 5 - Prob. 11ECh. 5 - Prob. 12ECh. 5 - Prob. 13ECh. 5 - Effect of credit card sales on financial...Ch. 5 - Prob. 15ECh. 5 - Prob. 16ECh. 5 - Prob. 17ECh. 5 - Prob. 18ECh. 5 - Prob. 19ECh. 5 - Prob. 20ECh. 5 - Prob. 21ECh. 5 - Prob. 22ECh. 5 - Prob. 23PCh. 5 - Prob. 24PCh. 5 - Prob. 25PCh. 5 - Prob. 26PCh. 5 - Prob. 27PCh. 5 - Prob. 28PCh. 5 - Prob. 29PCh. 5 - Prob. 30PCh. 5 - Prob. 31PCh. 5 - Prob. 32PCh. 5 - Prob. 33PCh. 5 - Prob. 1ATCCh. 5 - Prob. 3ATCCh. 5 - Prob. 4ATCCh. 5 - Alonzo Saunders owns a small training services...
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