5-1
Net Income
LIFO
Sales (3,500 @ $50)
Cost of Goods Sold:
From 10/1 Purchase
1,000 units @ $32
=
$32,000
From 4/1 Purchase
2,500 units @ $30
=
75,000
Cost of Goods Sold
Gross Margin
Operating Expenses
Income Before Tax
Income Tax Expense
($47,000 x 30%)
Net Income
EXERCISE 5-21 (cont.)
b. Income tax savings would be the difference between the tax using FIFO and the tax using LIFO, or $14,910 − $14,100 = $810.
c.
Windjammer Company
Cash Flows from Operating Activities
FIFO
LIFO
Cash Flows From Operating Activities:
Cash Inflow from Customers
$175,000
$175,000
Cash Outflow for Inventory*
(116,000)
(116,000)
Cash Outflow for Operating Expenses
(21,000)
(21,000)
Cash Outflow for Income Tax Expense
(14,910)
(14,100)
5-2
Net Cash Flow from Operating Activities
$23,090
$23,900
*Computation of cash paid for inventory:
4/1 Purchase 2,800 units @ $30 = $ 84,000
b. More income tax must be paid on the higher amount of income before tax reported under FIFO. Therefore, more cash used for
operating activities leaves less net cash flow from operating activities.
EXERCISE 5-22
Garden Gifts, Inc.
Effect of Events on Financial Statements
Panel 1: FIFO Cost Flow
Event
Cash
+
Inv.
=
C. Stk.
+
Ret. Ear.
Rev.
−
Exp.
=
Net Inc.
Cash Flows
1.
112,500
+
NA
=
NA
+
112,500
112,500
−
NA
=
112,500
112,500 OA
2.
(27,000)
+
27,000
=
NA
+
NA
NA
−
NA
=
NA
(27,000) OA
3.
(40,000)
+
40,000
=
NA
+
NA
NA
−
NA
=
NA
(40,000) OA
4.
NA
+
(57,000)1
=
NA
+
(57,000)
NA
−
57,000
=
(57,000)
NA
5.
(22,200)2
+
NA
=
NA
+
(22,200)
NA
−
22,200
=
(22,200)
(22,200) OA
Bal.
23,300
+
10,000
=
NA
+
33,300
112,500
−
79,200
=
33,300
23,300 NC
Panel 2: LIFO Cost Flow
Event
Cash
+
Inv.
=
C. Stk
+
Ret. Ear.
Rev.
−
Exp.
=
Net Inc.
Cash Flows
1.
112,500
+
NA
=
NA
+
112,500
112,500
−
NA
=
112,500
112,500 OA
2.
(27,000)
+
27,000
=
NA
+
NA
NA
−
NA
=
NA
(27,000) OA
3.
(40,000)
+
40,000
=
NA
+
NA
NA
−
NA
=
NA
(40,000) OA
4.
NA
+
(58,000)3
=
NA
+
(58,000)
NA
−
58,000
=
(58,000)
NA
5-3
5.
(21,800)4
+
NA
=
NA
+
(21,800)
NA
−
21,800
=
(21,800)
(21,800) OA
Bal.
23,700
+
9,000
=
NA
+
32,700
112,500
−
79,800
=
32,700
23,700 NC
1Cost of Goods Sold – FIFO: 4/2 150 units @ $180 = $27,000
2Income Tax Expense: ($112,500 − $57,000) x 40% = $22,200
4Income Tax Expense ($112,500 − $58,000) x 40% = $21,800
5-4
EXERCISE 5-22 (cont.)
b. Net Income assuming FIFO cost flow: $33,300 (see statements model above).
c. Net Income assuming LIFO cost flow: $32,700 (see statements model above).
d. LIFO produces a lower income tax by $400 ($22,200 − $21,800). This results because a
larger amount of inventory is expensed resulting in a lower income before tax. The last
purchase was bought at a higher price than the first purchase.
SOLUTIONS TO PROBLEMS – CHAPTER 5
PROBLEM 5-23
a.
Event Number
Type of Transaction
2014
1.
Asset Source
2.
Asset Exchange
3.
Asset Use
2015
1.
Asset Source
2.
Asset Exchange
3.
Asset Exchange
4a.*
Asset Exchange
4b.*
Asset Exchange
5.
Asset Use
6.
Asset Use
b. 2014 and 2015
Effect of Transactions on Financial Statements
No.
Assets
=
Liab.
+
Equity
Rev.
−
Exp.
=
Net Inc.
Cash Flows
2014
1.
+
NA
+
+
NA
+
NA
2.
+−
NA
NA
NA
NA
NA
+ OA
3.
−
NA
−
NA
+
−
NA
2015
1.
+
NA
+
+
NA
+
NA
5-5
2.
+−
NA
NA
NA
NA
NA
+ OA
3.
+−
NA
NA
NA
NA
NA
NA
4a.*
+−
NA
NA
NA
NA
NA
NA
4b.*
+−
NA
NA
NA
NA
NA
+ OA
5.
−
NA
−
NA
+
−
− OA
6.
−
NA
−
NA
+
−
NA
*4a. is reinstatement of the previously charged off receivable; 4b is the collection of the account.
PROBLEM 5-23 (cont.)
c. 2014
Expert Consulting Accounting Equation – 2014
Event
Assets
=
Liab.
+
Equity
Acct.
Title/RE
Cash
+
A. Rec.
−
Allow.
=
+
Ret. Earn.
1.
NA
70,000
NA
NA
70,000
Rev.
2.
62,000
(62,000)
NA
NA
NA
3.
NA
NA
1,400*
NA
(1,400)
Uncoll.
Exp
Bal.
62,000
+
8,000
−
1,400
=
-0-
+
68,600
*$70,000 x 2% = $1,400
d. (2014)
Expert Consulting
Financial Statements
For the Year Ended 2014
Income Statement
Service Revenue
$70,000
Uncollectible Accounts Expense
(1,400)
Net Income
$68,600
Statement of Changes in Stockholders’ Equity
Beginning Common Stock
$ -0-
Plus: Stock Issued
-0-
Ending Common Stock
$ -0-
Beginning Retained Earnings
$ -0-
5-6
Plus: Net Income
68,600
Ending Retained Earnings
68,600
Total Stockholders’ Equity
$68,600
(2014)
Expert Consulting
Financial Statements
Balance Sheet
As of December 31, 2014
Assets
Cash
$62,000
Accounts Receivable
$ 8,000
Less: Allowance for Doubtful Accounts
(1,400)
6,600
Total Assets
$68,600
Liabilities
$ -0-
Stockholders’ Equity
Common Stock
$ -0-
Retained Earnings
68,600
Total Stockholders’ Equity
68,600
Total Liabilities and Stockholders’ Equity
$68,600
Statement of Cash Flows
For the Year Ended 2014
Cash Flows From Operating Activities:
Inflow from Customers
$62,000
Net Cash Flow from Operating Activities
$62,000
Cash Flows From Investing Activities
-0-
Cash Flows From Financing Activities
-0-
Net Change in Cash
62,000
Plus: Beginning Cash Balance
-0-
Ending Cash Balance
$62,000
5-7
PROBLEM 5-23 (cont.)
c. 2015
Expert Consulting Accounting Equation – 2015
Event
Assets
=
Liab.
+
Equity
Acct./RE
Cash
+
A. Rec.
−
Allow.
=
+
Ret. Earn.
Bal.
62,000
8,000
1,400
-0-
68,600
1.
NA
84,000
NA
NA
84,000
Rev.
2.
70,000
(70,000)
NA
NA
NA
3.
NA
(1,100)
(1,100)
NA
NA
4a.
NA
200
200
NA
NA
4b.
200
(200)
NA
NA
NA
5.
(51,200)
NA
NA
NA
(51,200)
Op. Exp.
6.
NA
NA
840*
NA
(840)
Uncoll. Exp
Bal.
81,000
+
20,900
−
1,340
=
+
100,560
c. (2015)
Expert Consulting
Financial Statements
For the Year Ended 2015
Income Statement
Service Revenue
$84,000
Expenses
Operating Expenses
$51,200
Uncollectible Accounts Expense
840
Total Expenses
(52,040)
Net Income
$31,960
Statement of Changes in Stockholders’ Equity
Beginning Common Stock
$ -0-
Plus: Stock Issued
-0-
Ending Common Stock
$ -0-
Beginning Retained Earnings
$68,600
Plus: Net Income
31,960
Ending Retained Earnings
100,560
Total Stockholders’ Equity
$100,560
5-8
PROBLEM 5-23 d. (cont.)
(2014)
Expert Consulting
Financial Statements
Balance Sheet
As December 31, 2015
Assets
Cash
$ 81,000
Accounts Receivable
$20,900
Less: Allowance for Doubtful Accounts
(1,340)
19,560
Total Assets
$100,560
Liabilities
$ -0-
Stockholders’ Equity
Common Stock
$ -0-
Retained Earnings
100,560
Total Stockholders’ Equity
100,560
Total Liabilities and Stockholders’ Equity
$100,560
Statement of Cash Flows
For the Year Ended 2015
Cash Flows From Operating Activities:
Inflow from Customers
$70,200
Outflow for Expenses
(51,200)
Net Cash Flow from Operating Activities
$19,000
Cash Flows From Investing Activities
-0-
Cash Flows From Financing Activities
-0-
Net Change in Cash
19,000
Plus: Beginning Cash Balance
62,000
Ending Cash Balance
$81,000
5-9
PROBLEM 5-24
a.
Accounts Receivable
Allowance for Doubtful Accounts
Beg. Bal. 96,200
Beg. Bal. 6,250
Sales on account. 726,000
Uncoll. Acct. expense 3,630
Collections on account (715,000)
Write off of bad accts (3,100)
Write off of bad accts (3,100)
Bal. 6,780
Bal. $104,100
a. (2) Accounts Receivable Balance, 12/31/14
$104,100
Less: Allowance for Doubtful Accounts, 12/31/14
(6,780)
Net Realizable Value
$ 97,320
5-10
PROBLEM 5-25
a.
Frankel Inc. Accounting Equation 2014
Assets
=
Liab.
+
Equity
Event
Cash
+
A. Rec.
−
Allow.
+
Mdse Inv.
=
Accts. Pay.
+
Com.
Stock
=
Ret. Earn.
Acct.
Title/RE
1.
60,000
NA
NA
NA
NA
60,000
NA
2.
NA
NA
NA
210,000
210,000
NA
NA
3a.
NA
310,000
NA
NA
NA
NA
310,000
Rev.
3b.
NA
NA
NA
(165,000)
NA
NA
(165,000)
Cost of Sales
4.
278,000
(278,000)
NA
NA
NA
NA
NA
5.
(190,000)
NA
NA
NA
(190,000)
NA
NA
6.
(46,000)
NA
NA
NA
NA
NA
(46,000)
Sal. Exp.
7.
(62,000)
NA
NA
NA
NA
NA
(62,000)
Op. Exp.
8.
NA
NA
2,102*
NA
NA
NA
(2,102)
Uncoll. Exp.
Bal.
40,000
+
32,000
−
2,102
+
45,000
=
20,000
+
60,000
+
34,898
*
Number of Days
Past Due
Amount
Percent Likely to Be
Uncollectible
Allowance
Balance
Current
$15,700
.01
$ 157
0-30
8,500
.05
425
31-60
4,000
.10
400
61-90
2,600
.20
520
Over 90 days
1,200
.50
600
Total
$2,102
5-11
PROBLEM 5-25 (cont.)
b.
Frankel Inc.
Financial Statements
For the Year Ended 2014
Income Statement
Sales Revenue
$310,000
Cost of Goods Sold
(165,000)
Gross Margin
145,000
Operating Expenses
Operating Expenses
$62,000
Salaries Expense
46,000
Uncollectible Accts. Expense
2,102
Total Operating Expenses
(110,102)
Net Income
$ 34,898
Statement of Changes in Stockholders’ Equity
Beginning Common Stock
$ -0-
Plus: Stock Issued
60,000
Ending Common Stock
$60,000
Beginning Retained Earnings
$ -0-
Plus: Net Income
34,898
Ending Retained Earnings
34,898
Total Stockholders’ Equity
$94,898