Question

The accounting records of Wall’s China Shop reflected the following balances as of January 1, Year 3: Cash $ 18,900 Beginning inventory 19,350 (215 @ $90) Common stock 14,500 Retained earnings 23,750 The following five transactions occurred in Year 3: First purchase (cash): 125 units @ $92 Second purchase (cash): 205 units @ $100 Sales (all cash): 370 units @ $186 Paid $16,050 cash for salaries expense Paid cash for income tax at the rate of 25 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 the income tax expense for each method. b. Use a vertical model to show the Year 3 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

WALL'S CHINA SHOP
Inventory Purchases
Beginning inventory	215	$                                 90	19350
First purchase	125	$                                 92	11500
Second purchase	205	$                               100	20500
Total	545		51350
FIFO	Units	Cost	Cost of goods sold
From beginning inventory	215	$                                 90	19350
From first purchase	125	$                                 92	11500
From second purchase	30	$                               100	3000
Total	370		33850
FIFO	Units	Unit Cost	Ending inventory
From second purchase	175	$                               100	$                                      17,500
LIFO	Units	Unit Cost	Cost of goods sold
From second purchase	205	$                               100	$                                      20,500
From first purchase	125	$                                 92	$                                      11,500
From beginning inventory	40	$                                 90	$                                        3,600
Total	370		35600
LIFO	Units	Unit Cost	Ending Inventory
From beginning inventory	175	$                                 90	$                                      15,750
Weighted average
Total Cost	Total units	Cost per Unit
51,350	545	$                           94.22
Cost of goods sold:	370	$                           94.22	$                                      34,861
Ending inventory:	175	$                           94.22	$                                      16,489
	FIFO	LIFO	Weighted Average
Cost of goods sold	33,850	35,600	34,861
Ending inventory	17,500	15,750	16,489
WALL'S CHINA SHOP
Income Statements
For the Year Ended December 31, 2018
	FIFO	LIFO	Weighted Average
Sales	68820	68820	68820
Cost of goods sold	-33,850	-35,600	-34,861
Gross margin	34,970	33,220	33,959
Salaries expense	-16,050	-16,050	-16,050
Income before tax	18,920	17,170	17,909
Income tax expenses	-4,730	-4,293	-4,477
Net income	14,190	12,878	13,431
WALL'S CHINA SHOP
Balance Sheets
As of December 31, 2018
	FIFO	LIFO	Weighted Average
Assets
Cash	34,940	35,378	35,193
Inventory	17,500	15,750	16,489
Total assets	52,440	51,128	51,681
Stockholders' equity
Common stock	14500	14500	14500
Retained earnings	37,940	36,628	37,181
Total stockholders' equity	52,440	51,128	51,681
Cash balance is calculated as
opening balance	18900	18900	18900
add:sales	68820	68820	68820
less:puchases
1st purchase	-11500	-11500	-11500
2nd purchase	-20500	-20500	-20500
salary expense	-16,050	-16,050	-16,050
tax expense	-4,730	-4,293	-4,477
ending balance	34940	35378	35193
WALL'S CHINA SHOP
Statements of Cash Flows
For the Year Ended December 31, 2018
	FIFO	LIFO	Weighted Average
Cash flows from operating activities
Cash inflow from customers	68820	68820	68820
Cash outflow for inventory	-32,000	-32,000	-32,000
Cash outflow for salaries expense	-16,050	-16,050	-16,050
Cash outflow for income tax	-4,730	-4,293	-4,477
Net cash flows from operating activities	16,040	16,478	16,293
Cash flows from investing activities
Cash flows from financing activities
Net change in cash	16,040	16,478	16,293
Plus: Beginning cash balance	18,900	18,900	18,900
Ending cash balance	34,940	35,378	35,193