Chapter 5, Problem 33P

a. 1

To determine

Compute the cost of goods sold, ending inventory, and the income tax expense under FIFO cost flow method.

Answer to Problem 33P

Computation of cost of goods sold under FIFO cost flow method is as follows:

FIFO	Units	Unit Cost	Cost of Goods Sold
Beginning Inventory	200	$140	$28,000
First Purchase	120	$150	$18,000
Second Purchase	80	$160	$12,800
Total	400		$58,800

Table (1)

Computation of ending inventory under FIFO cost flow method is as follows:

FIFO	Units	Unit Cost	Ending Inventory
Second Purchase	60 Table (4)	$160	$9,600

Table (2)

Explanation of Solution

First-in-First-Out: In First-in-First-Out method, the costs of the initially purchased items are considered as cost of goods sold, for the items which are sold first. The value of the ending inventory consists of the recent purchased items.

Cost of goods sold: Cost of goods sold is the accumulate total of all direct cost incurred in manufacturing the goods or the products which has been sold during a period. Cost of goods sold involves direct material, direct labor, and manufacturing overheads.

Ending Inventory: It represents the quantity and price of the goods unsold and laying at the store at the end of a particular period.

Working note 1: Calculate total purchase amount:

Inventory Purchases
Particulars	Units	Unit Cost	Total cost
Beginning Inventory	200	$140	$28,000
First Purchase	120	$150	$18,000
Second Purchase	140	$160	$22,400
Goods available for sale	460		$68,400
Less: Cost of goods sold	(400)
Ending inventory	60

Table (3)

Working note 2: Calculate sales amount:

$\begin{array}{c}\text{Sales}=\text{400 Units}\times \text{\$320}\\ =\text{\$128,000}\end{array}$

Working note 3: Calculate income tax expense amount:

$\begin{array}{c}\text{Income tax expense}=\text{Income before tax}\times \text{Tax rate }\\ =\text{\$29,200}\times \frac{25}{100}\\ =\$7,300\end{array}$

a. 2

To determine

Compute the cost of goods sold and the ending inventory under LIFO cost flow method.

Answer to Problem 33P

Compute the cost of goods sold under LIFO cost flow method as follows:

LIFO	Units	Unit Cost	Cost of Goods Sold
Second Purchase	140	$160	$22,400
First Purchase	120	$150	$18,000
Beginning Inventory	140	$140	$19,600
Total	400		$60,000

Table (4)

Compute the ending inventory under LIFO cost flow method as follows:

LIFO	Units	Unit Cost	Ending Inventory
Second Purchase	60 Table (4)	$140	$8,400

Table (5)

Explanation of Solution

Last-in-Last-Out: In Last-in-First-Out method, the costs of last purchased items are considered as the cost of goods sold, for the items which are sold first. The value of the closing stock consists of the initial purchased items.

Working note 4: Calculate income tax expense amount:

$\begin{array}{c}\text{Income tax expense}=\text{Income before tax}\times \text{Tax rate }\\ =\text{\$28,0000}\times \frac{25}{100}\\ =\$7,000\end{array}$

a. 3

To determine

Compute the cost of goods sold and the ending inventory under weighted average cost flow method.

Answer to Problem 33P

Compute the cost of goods sold and the ending inventory under weighted average cost flow method as follows:

Weighted average	Units	Unit Cost	Total cost
Cost of goods sold	400	$148.69	$59,476.0
Ending inventory	60	$148.69	$8,921.4

Table (6)

Note: Refer working note 5 for unit cost.

Explanation of Solution

Weighted-average cost method:  Under Weighted average cost method, the company calculates a new average cost after every purchase is made. It is determined by dividing the cost of goods available for sale by the units on hand.

Working note 5: Determine average unit cost:

$\begin{array}{c}\text{Average Unit cost}=\frac{\text{Goods avaivable for sale}}{\text{Total Units}}\\ =\frac{\text{\$68,400 Table}\left(4\right)}{460}\\ =\text{\$148}\text{.69}\end{array}$

Working note 6: Calculate income tax expense amount:

$\begin{array}{c}\text{Income tax expense}=\text{Income before tax}\times \text{Tax rate }\\ =\text{\$28,524}\times \frac{25}{100}\\ =\$7,131\end{array}$

b.

To determine

Show the 2014’s income statement, balance sheet and statement of cash flows under FIFO, LIFO and weighted average using a vertical model.

Explanation of Solution

Financial statement: The financial statement records and shows all the financial status of the business. The financial statement consists of the balance sheet, income statement, statement of retained earnings, and the cash flow statement.

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 the 2014’s income statement of Company CL under each cost flow method as follows:

Company CL
Income Statements
For Year Ended December 31, 2014
Particulars	FIFO	LIFO	Weighted average
Sales	$128,000	$128,000	$128,000
Less: Cost of Goods Sold	($58,800)	($60,000)	$59,476
Gross Margin	$69,200	$68,000	$68,524
Less: Salaries Expense	($40,000)	($40,000)	($40,000)
Income Before Tax	$29,200	$28,000	$28,524
Less: Income Tax Expense	($7,300)	($7,000)	($7,131)
Net Income	$21,900	$21,000	$21,393

Table (7)

Balance sheet: A balance sheet is a financial statement consists of the assets, liabilities, and the stockholder’s equity of the company. The balance of the assets account must be equal to that of the liabilities and the stockholder’s equity account.

Prepare the 2014’s Balance sheet of Company CL under each cost flow method as follows:

Company CL
Balance sheet
For Year Ended December 31, 2014
Particulars	FIFO	LIFO	Weighted average
Assets:
Cash	$130,800	$131,100	$130,969
Inventory	$9,600	$8,400	$8,924
Total Assets	$140,400	$139,500	$139,893
Stockholders’ Equity
Common Stock	$40,000	$40,000	$40,000
Retained Earnings	$100,400	$99,500	$99,893
Total Stockholders’ Equity	$140,400	$139,500	$139,893

Table (8)

Statement of cash flows: Statement of cash flows reports all the cash transactions which are responsible for inflow and outflow of cash and result of these transactions is reported as ending balance of cash at the end of reported period. Statement of cash flows includes the changes in cash balance due to operating, investing, and financing activities.

Prepare the 2014’s statement of cash flows of Company CL under each cost flow method:

Company CL
Statement of cash flows
For Year Ended December 31, 2014
Particulars	FIFO	LIFO	Weighted average
Cash Flows From Operating Activities:
Cash Inflow from Customers	$128,000	$128,000	$128,000
Less: Cash Outflow for Inventory	($40,400)	($40,400)	($40,400)
Cash Outflow for Salaries Expense	($40,000)	($40,000)	($40,000)
Cash Outflow for Income Tax expense	($7,300)	($7,000)	($7,131)
Net Cash Flow from Operating Activities	$40,300	$40,600	$40,469
Cash Flows From Investing Activities:	$0	$0	$0
Cash Flows From Financing Activities:	$0	$0	$0
Net Change in Cash	$40,300	$40,600	$40,469
Add: Beginning Cash Balance	$90,500	$90,500	$90,500
Ending Cash Balance	$130,800	$131,100	$130,969

Table (9)

Working note 7: Record the events in an accounting equation:

Event	Assets			=	Stockholders’ Equity
	Cash	+	Inventory	=	Common Stock	Retained Earnings
FIFO Cost Flow
Beginning Balance	$90,500	+	$28,000	=	$40,000	$78,500
1. First Purchase	($18,000)	+	$18,000	=
2. Second Purchase	($22,400)	+	$22,400	=
3a. Sale of Inventory	$128,000	+		=		$128,000
3b. Cost of Goods Sold		+	($58,800)	=		($58,800)
4. Paid Salary Expense	($40,000)	+		=		($40,000)
5. Paid Income Tax expense	($7,300)	+		=		($7,300)
Totals	$130,800	+	$9,600	=	$40,000	$100,400
LIFO Cost Flow
Beginning Balance	$90,500	+	$28,000	=	$40,000	$78,500
1. First Purchase	($18,000)	+	$18,000	=
2. Second Purchase	($22,400)	+	$22,400	=
3a. Sale of Inventory	$128,000	+		=		$128,000
3b. Cost of Goods Sold		+	($60,000)	=		($60,000)
4. Paid Operating Expenses	($40,000)	+		=		($40,000)
5. Paid Income Tax expense	($7,000)	+		=		($7,000)
Totals	$131,100	+	$8,400	=	$40,000	$99,500
Weighted Average
Beginning Balance	$90,500	+	$28,000	=	$40,000	$78,500
1. First Purchase	($18,000)	+	$18,000	=
2. Second Purchase	($22,400)	+	$22,400	=
3a. Sale of Inventory	$128,000	+		=		$128,000
3b. Cost of Goods Sold		+	($59,476)	=		($59,476)
4. Paid Operating  Expenses	($40,000)	+		=		($40,000)
5. Paid Income Tax	($7,131)	+		=		($7,131)
Totals	$130,969	+	$8,924	=	$40,000	$99,893

Table (10)