Question

The accounting records of Wall’s China Shop reflected the following balances as of January 1, 2018:

Cash	$	18,900
Beginning inventory		18,920		(220 units @ $86)
Common stock		15,800
Retained earnings		22,020

The following five transactions occurred in 2018:

First purchase (cash) 120 units @ $88

Second purchase (cash) 200 units @ $96

Sales (all cash) 370 units @ $193

Paid $16,650 cash for salaries expense

Paid cash for income tax at the rate of 25 percent of income before taxes

Required

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 the income tax expense for each method.

Use a vertical model to show the 2018 income statement, balance sheet, and statement of cash flows under FIFO, LIFO, and weighted average. (Hint: Record the events under an accounting equation before preparing the statements.)

Answer 1

Cost of goods sold assuming and ending inventory

1 FIFO Cost flow:

Total number of units sold = 370

Cost of goods sold = (220*86) + (120*88) + (30*96)

= $ 32,360

Closing Inventory units = 220+120+200-370

= 170

Value of closing inventory = 170*96

= $16,320

2 LIFO Cost flow:

Total number of units sold = 370

Cost of goods sold = (200*96) + (120*88) + (50*86)

= $ 34,060

Closing Inventory units = 220+120+200-370

= 170

Value of closing inventory = 170*86

= $ 14,620

3 Weighted Average Cost flow:

Total number of units sold = 370

Weighted Average Cost per unit = ((220*86) + (120*88) + (200*96)) / (220+120+200)

= $ 90.15

Cost of goods sold = 370*90.148

= $ 33,355 (Approx.)

Closing Inventory units = 220+120+200-370

= 170

Value of closing inventory = 170*90.148

= $ 15,325.

Tax Expense in

FIFO = $ 4,950

LIFO = $ 4,100

Weighted Average = $ 4452.50