5-26
EXERCISE 5-6A (cont.)
c. Income tax paid using FIFO: $32,430
Income tax paid using LIFO: $31,710
d.
Parvin Company
Cash Flows from Operating Activities
FIFO
LIFO
Cash Flows From Operating Activities:
Cash Inflow from Customers
$243,000
$243,000
Cash Outflow for Inventory*
(92,800)
(92,800)
Cash Outflow for Operating Expense
(41,500)
(41,500)
Cash Outflow for Income Tax Expense
(32,430
(31,710)
Net Cash Flow from Operating Activities
$ 76,270
$ 76,990
*Computation of cash paid for inventory:
4/1 Purchase 2,000 units @ $35 = $70,000
10/1 Purchase 600 units @ 38 = 22,800
$92,800
e. The difference in cash flow from operating activities between FIFO
and LIFO is caused by the difference in income tax paid for the two
methods. Taxable income is greater by using FIFO; consequently
more income tax will be paid causing a greater cash outflow for tax
expense.
5-27
EXERCISE 5-7A a. NC = Net Change in Cash
The Brick Company
Effect of Events on Financial Statements
Panel 1: FIFO Cost Flow
Event
Cash
+
Inv.
=
Ret. Ear.
Rev.
−
Exp.
=
Net Inc.
Cash Flows
1. Sales
280,000
+
NA
=
280,000
280,000
−
NA
=
280,000
280,000 OA
2. 4/2
(81,900)
+
81,900
=
NA
NA
−
NA
=
NA
(81,900) OA
3. 9/1
(68,000)
+
68,000
=
NA
NA
−
NA
=
NA
(68,000) OA
4. CGS
NA
+
(103,150)1
=
(103,150)
NA
−
103,150
=
(103,150)
NA
5. Tax
(70,740)2
+
NA
=
(70,740)
NA
−
70,740
=
(70,740)
(70,740) OA
Bal.
59,360
+
46,750
=
106,110
280,000
−
173,890
=
106,110
59,360 NC
Panel 2: LIFO Cost Flow
Event
Cash
+
Inv.
=
Ret. Ear.
Rev.
−
Exp.
=
Net Inc.
Cash Flows
1. Sales
280,000
+
NA
=
280,000
280,000
−
NA
=
280,000
280,000 OA
2. 4/2
(81,900)
+
81,900
=
NA
NA
−
NA
=
NA
(81,900) OA
3. 9/1
(68,000)
+
68,000
=
NA
NA
−
NA
=
NA
(68,000) OA
4. CGS
NA
+
(107,000)3
=
(107,000)
NA
−
107,000
=
(107,000)
NA
5. Tax
(69,200)4
+
NA
=
(69,200)
NA
−
69,200
=
(69,200)
(69,200) OA
Bal.
60,900
+
42,900
=
103,800
280,000
−
176,200
=
103,800
60,900 NC
1Cost of Goods Sold — FIFO: 4/2 210 units @ $375 = $ 81,900
5-28
EXERCISE 5-7A (cont.)
b. Net Income assuming FIFO cost flow: $106,110 (see statements
model above).
e. FIFO
EXERCISE 5-8A
a.
Green Company – General Journal
Date
Account Titles
Debit
Credit
1/1/12
Inventory (260 @ $50)
13,000
Cash
13,000
4/1a
Cash (130 @ $85)
11,050
Sales Revenue
11,050
4/1b
Cost of Goods Sold (130 @ $48)
6,240
Inventory
6,270
8/1
Inventory (390 @ $56)
21,840
Cash
21,840
12/1a
Cash (490 @ $96)
47,040
Sales Revenue
47,040
12/1b
Cost of Goods Sold*
25,480
Inventory
25,480
*Cost of Goods Sold: 50 @ $48 = $ 2,400
260 @ $50 = 13,000
180 @ $56 = 10,080
490 $25,480
5-30
EXERCISE 5-9A
a. The Hat Store, Inc.
Date
Purchased
Sold
Inventory Balance
Units
Cost
Total
Units
Cost
Total
Units
Cost
Total
1/1 Beg. Inv.
50 @
$40
=
$2,000
3/15 Pur.
200 @
$42
=
$8,400
50 @
200 @
$40
$42
=
=
$2,000
$8,400
5/30 Sold
170 units
50 @
120 @
$40
$42
=
=
$2,000
$5,040
80 @
$42
=
-0-
$3,360
8/10 Pur.
275 @
$46
=
$12,650
80 @
275 @
$42
$46
=
=
$3,360
$12,650
11/20 Sold
340 units
80 @
260 @
$42
$46
=
=
$ 3,360
$11,960
15 @
$46
=
-0-
$690
Ending Inventory: 15 units @ $46 = $690
b. A problem arises when Weighted Average is applied to intermittent
sales and purchase transactions. Weighted Average requires that
average cost be computed when each sale is made. This problem is
often overcome by recording only quantities of units sold on a
perpetual basis. At the end of the accounting period, costs are then
assigned perpetually to the units that have been sold.
5-31
EXERCISE 5-10A
a.
Hagen Metal Works
a.
b.
c.
d.
e.
f.
g.
Item
Quantity
Cost Per
Unit
Mkt. Val.
per Unit
Total
Cost
Total
Market
Ind. Item
Lower
Cost/Mkt
.
(b x c)
(b x d)
e or f
C
90
$ 24
$ 16
$2,160
$1,440
$1,440
D
75
22
20
1,650
1,500
1,500
K
40
25
28
1,000
1,120
1,000
M
22
15
17
330
374
330
$5,140
$4,434
$4,270
1. Ending inventory using the individual item method: $4,270
2. Ending Inventory using the aggregate method: $4,434
b.
Date
Account Titles
Debit
Credit
1.
Cost of Goods Sold*
870
Inventory
870
2.
Cost of Goods Sold**
706
Inventory
706
5-32
EXERCISE 5-11A
a.
a.
b.
c.
d.
e.
f.
g.
Item
Quantity
Cost
Per
Unit
Mkt.
Value Per
Unit
Unit Lower
Cost/Mkt.
Total
Cost
Total
Lower
Cost/Mkt.
(b x c)
(b x e)
A
120
$60
$55
$55
$ 7,200
$ 6,600
F
170
80
75
75
13,600
12,750
K
110
30
40
30
3,300
3,300
Totals
$24,100
$22,650
The inventory would be carried at $22,650, the lower of cost or
market applied to individual inventory items.
b.
Account Title
Debit
Credit
Cost of Goods Sold (Inventory Loss)
1,450
Merchandise Inventory
1,450
5-33
EXERCISE 5-12A
Prentiss Sporting Goods
a. Gross Margin: Sales x Gross Margin %
$250,000 x 25% = $62,500
5-34
EXERCISE 5-13A
June 14 Inventory Account Balance
$280,000
Less: Cost of Unrecorded Sales
(42,000)
Correct Inventory Balance
238,000
Less: 5% Shrinkage
(11,900)
Less: Amount of Inventory in
Showroom
(58,000)
Inventory Damaged by Fire
$168,100
5-35
EXERCISE 5-14A
Stubbs Company
The uncounted inventory will only affect The Stubbs Company’s balance
5-36
EXERCISE 5-15A
Carver Co.
Item Number
Year
Amount Affected
Effect
1.
2016
Beginning Inventory
NA
2.
2016
Purchases
NA
3.
2016
Goods Available for Sale
NA
4.
2016
Cost of Goods Sold
Overstated
5.
2016
Gross Margin
Understated
6.
2016
Net Income
Understated
7.
2017
Beginning Inventory
Understated
8.
2017
Purchases
NA
9.
2017
Goods Available for Sale
Understated
10.
2017
Cost of Goods Sold
Understated
11.
2017
Gross Margin
Overstated
12.
2017
Net Income
Overstated
5-37
EXERCISE 5-16A
Most of Alcoa’s operations outside the United States are probably in
LIFO.
5-38
EXERCISE 5-17A
GAAP VS IFRS
a. GAAP allows the use of LIFO for reporting inventory and cost of
goods sold. This assumes that the newest goods purchased are the
SOLUTIONS TO PROBLEMS – SERIES A – CHAPTER 8
PROBLEM 5-18A
Wall’s China Shop
Inventory Purchases
Beginning Inventory
220
@
$150
=
$33,000
First Purchase
150
@
155
=
23,250
Second Purchase
160
@
160
=
25,600
Total
530
$81,850
a. (1) Cost of Goods Sold:
FIFO
Units
Unit
Cost
Cost of Goods
Sold
From Beginning Inventory
220
@
$150
=
$ 33,000
From First Purchase
150
@
155
=
23,250
From Second Purchase
40
@
160
=
6,400
Total
410
$62,650
From Second Purchase
@
LIFO
Units
Unit Cost
Cost of Goods
Sold
From Second Purchase
160
From First Purchase
155
23,250
From Beginning Inventory
100
Total
410
$63,850
LIFO
Unit Cost
From Beginning Inventory
5-40
PROBLEM 5-18A a. (cont.)
a. (3)
Weighted Average
Total Cost
Total Units
=
Cost per Unit
$81,850
530
=
$154.433
Cost of Goods Sold:
410 units
@
$154.433
=
$63,318*
Ending Inventory:
120 units
@
$154.433
=
$18,532*
*rounded
Wall’s China Shop
Computation of Income Tax Expense and Net Income
FIFO
LIFO
Weighted
Average
Sales (410 units @ $320)
$131,200
$131,200
$131,200
Cost of Goods Sold
(62,650)
(63,850)
(63,318)
Gross Margin
68,550
67,350
67,882
Salaries Expense
(38,000)
(38,000)
(38,000)
Income Before Tax
30,550
29,350
29,882
Income Tax (25%)
(7,638)
(7,338)
(7,471)
Net Income
$22,912
$22,012
$22,411
PROBLEM 5-18A (cont.)
5-42
PROBLEM 5-18A (cont.)
b. (1) FIFO
Cash
Common Stock
Bal. 80,100
Bal. 50,000
3a. 131,200
1. 23,250
2. 25,600
Retained Earnings
4. 38,000
Bal. 63,100
5. 7,638
Bal. 116,812
Sales Revenue
3a. 131,200
Merchandise Inventory
Bal. 33,000
Cost of Goods Sold
1. 23,250
3b. 62,650
2. 25,600
3b. 62,650
Bal. 19,200
Salaries Expense
4. 38,000
Income Tax Expense
5. 7,638
PROBLEM 5-18A (cont.)
5-44
PROBLEM 5-18A (cont.)
b. (2) LIFO
Cash
Common Stock
Bal. 80,100
Bal. 50,000
3a. 131,200
1. 23,250
2. 25,600
Retained Earnings
4. 38,000
Bal. 63,100
5. 7,338
Bal. 117,112
Sales Revenue
3a. 131,200
Merchandise Inventory
Bal. 33,000
Cost of Goods Sold
1. 23,250
3b. 63,850
2. 25,600
3b. 63,850
Bal. 18,000
Salaries Expense
4. 38,000
Income Tax Expense
5. 7,338
PROBLEM 5-18A (cont.)