Question

Laker Company reported the following January purchases and sales data for its only product.

Date			Activities	Units Acquired at Cost								Units sold at Retail
Jan.	1		Beginning inventory	240	units	@	$	16.50	=	$	3,960
Jan.	10		Sales										190	units	@	$	25.50
Jan.	20		Purchase	170	units	@	$	15.50	=		2,635
Jan.	25		Sales										190	units	@	$	25.50
Jan.	30		Purchase	380	units	@	$	15.00	=		5,700
			Totals	790	units					$	12,295		380	units

The Company uses a perpetual inventory system. For specific identification, ending inventory consists of 410 units, where 380 are from the January 30 purchase, 5 are from the January 20 purchase, and 25 are from beginning inventory.

Part 1. Complete comparative income statements for the month of January for Laker Company for the four inventory methods (LIFO, FIFO, Specific Identification, Weighted Average). Assume expenses are $2,250, and that the applicable income tax rate is 40%.

Part 2. Which method yields the highest net income?

LIFO

FIFO

Specific identification

Weighted average

Part 3. Does net income using weighted average fall between that using FIFO and LIFO?

No

Yes

Part 4. If costs were rising instead of falling, which method would yield the highest net income?

Specific identification

LIFO

Weighted average

FIFO

Answer 1

A	Specific identification:
		Available for sale				Cost of goods sold			Ending inventory
	Purchase date	Activity	Units	Rate	Cost	Units	Rate	Cost	Units	Rate	Cost
	1-Jan	Beginning inventory	240	$16.50	$3,960	215	$16.50	$3,547.50	25	$16.50	$412.50
	20-Jan	Purchases	170	$15.50	$2,635	165	$15.50	$2,557.50	5	$15.50	$77.50
	30-Jan	Purchases	380	$15.00	$5,700	0	$15.00	$0.00	380	$15.00	$5,700
	Total					Cost of goods sold		$6,105	Ending inventory		$6,190
	Sold units = No. of units available on particular date - Ending inventory units on the same date.
B	Weighted Average (Perpetual)
	Purchase				Cost of goods sold			Balance
	Date	Quantity	Rate	Total cost	Quantity	Rate	Total cost	Quantity	Rate	Total cost
	1-Jan	240	$16.50	$3,960				240	$16.50	$3,960
	10-Jan				190	$16.50	$3,135	50	$16.50	$825
	20-Jan	170	$15.50	$2,635				220	$15.73	3460
	25-Jan				190	$15.73	$2,988	30	$15.73	$472
	30-Jan	380	$15.00	$5,700				410	$15.05	$6,172
	Total				Cost of goods sold		$6,123	Cost of Ending inventory		$6,172
	*Weighted average rate is calculated by using the formula of (Total available balance / Total units available).
C	FIFO Perpetual:
	Purchase				Cost of goods sold			Balance
	Date	Quantity	Rate	Total cost	Quantity	Rate	Total cost	Quantity	Rate	Total cost
	1-Jan	240	$16.50	$3,960				240	$16.50	$3,960
	10-Jan				190	$16.50	$3,135	50	$16.50	$825
	20-Jan	170	$15.50	$2,635				50	$16.50	$825
								170	$15.50	$2,635
	25-Jan				50	$16.50	$825
					140	$15.50	$2,170	30	$15.50	$465
	30-Jan	380	$15.00	$5,700				30	$15.50	$465
								380	$15.00	$5,700
	Total				Cost of goods sold		$6,130	Cost of Ending inventory		$6,165
	*In FIFO method the units that have purchased first are released the first one.
D	Perpetual LIFO:
	Purchase				Cost of goods sold			Balance
	Date	Quantity	Rate	Total cost	Quantity	Rate	Total cost	Quantity	Rate	Total cost
	1-Jan	240	$16.50	$3,960				240	$16.50	$3,960
	10-Jan				190	$16.50	$3,135	50	$16.50	$825
	20-Jan	170	$15.50	$2,635				50	$16.50	$825
								170	$15.50	$2,635
	25-Jan				170	$15.50	$2,635
					20	$16.50	$330	30	$16.50	$495
	30-Jan	380	$15.00	$5,700				30	$16.50	$495
								380	$15.00	$5,700
	Total				Cost of goods sold		$6,100	Cost of Ending inventory		$6,195
	*In LIFO method the units that have purchased last, are released the first one.
Ans. 1	L A K E R COMPANY
	Income Statements
	For Month Ended January 31
		Specific identification	Weighted avg.	FIFO	LIFO
	Sales	$9,690	$9,690	$9,690	$9,690
	Cost of goods sold	-6105	-6123	-$6,130.00	-$6,100.00
	Gross profit	$3,585	$3,567	$3,560	$3,590
	Expenses	-$2,250	-$2,250	-$2,250	-$2,250
	Income before taxes (a)	$1,335	$1,317	$1,310	$1,340
	Income tax expenses (a*0.40)	-$534.00	-$526.80	-$524.00	-$536.00
	Net income	$801.00	$790.20	$786.00	$804.00
	*Sales =   Total no. of units * selling price per unit
		(190 + 190) * $25.50
		$9,690
Ans.2	LIFO method yields the highest Net income.
Ans. 3	Yes, net income under weighted average method is $790.20 which is falls between FIFO ($786) and LIFO ($804).
Ans. 4	FIFO
	Explanations: When prices are rising, the FIFO inventory method provides the lowest cost of goods sold
	and highest net income, because in FIFO method the units are sold from the first purchases so the units will be
	sold on lower rate as a result cost of goods sold will be lowest which provides the higher Net income.