Question

The accounting records of Wall's China Shop reflected the following balances as of January 1, Year 2:

Cash	$	19,000
Beginning inventory		15,040	(160 units @ $94)
Common stock		15,500
Retained earnings		18,540

The following five transactions occurred in Year 2:

1. First purchase (cash) 115 units @ $96
2. Second purchase (cash) 200 units @ $104
3. Sales (all cash) 420 units @ $187
4. Paid $14,500 cash for salaries expenses.
5. Paid cash for income tax at the rate of 40 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. (this part has been omitted)

c. Use a vertical model to show the Year 2 income statement, balance sheet, and statement of cash flows under FIFO, LIFO, and weighted average.

• Required A
• Required C

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. (Round intermediate calculations to 3 decimal places. Round your final answers to the nearest whole dollar amount.)

	Cost of Goods Sold Ending Inventory FIFO LIFO Weighted Average WALL's CHINA SHOP Computation of Income Tax Expense and Net Income FIFO LIFO Weighted Average

Use a vertical model to show the Year 2 income statement, balance sheet, and statement of cash flows under FIFO, LIFO, and weighted average. (Round intermediate calculations to 3 decimal places. Round your final answers to the nearest whole dollar amount. Amounts to be deducted and losses should be indicated with a minus sign.)

WALL’s CHINA SHOP Income Statements FIFO LIFO Weighted Average WALL's CHINA SHOP Balance Sheets As of December 31, Year 2 FIFO LIFO Weighted Average Assets Total assets Stockholders' equity Total stockholders' equity WALL's CHINA SHOP Statements of Cash Flows For the Year Ended December 31, Year 2 FIFO LIFO Weighted Average Cash flows from operating activities Net cash flows from operating activities Cash flows from investing activities Cash flows from financing activities Net change in cash Ending cash balance

Answer 1

a.

WALL,S CHINA SHOP

Computation of cost of goods sold and ending inventory:

	Cost of goods sold	Ending inventory
FIFO	$41,160 (160*94 + 115*96 + 145*104)	$5,720 (55*104)
LIFO	41,710 (200*104 + 115*96 + 105*94)	5,170 (55*94)
Weighted Average	41,452 420 * (160*94 + 115*96 + 200*104)/160+115+200	5,428 55 * 98.695
Ending inventory(units) = 475 - 420 = 55 Weighted average cost per unit = 160*94 + 115*96 + 200*104) /160+115+200 = $98.695 (Rounded off)

WALL'S CHINA SHOP

Computation of income tax expense and net income

	FIFO	LIFO	Weighted Average
Income before tax * (A)	$22,880	$22,330	$22,588
Income tax expense @ 40% (B)	9,152	8,932	9,035
Net income (A) - (B)	13,728	13,398	13,553
* Income before tax = Sales - Cost of goods sold - Salaries expense

b

WALL'S CHINA SHOP Income Statements
	FIFO	LIFO	Weighted Average
Sales (420 * $187)	$78,540	$78,540	$78,540
Cost of goods sold	- 41,160	- 41,710	- 41,452
Gross Profit	37,380	36,830	37,088
Salaries expense	- 14,500	- 14,500	- 14,500
Income before tax	22,880	22,330	22,588
Income tax expense @ 40%	- 9,152	- 8,932	- 9,035
Net income	$13,728	$13,398	$13,553

WALL'S CHINA SHOP Balance Sheet As of December 31 ,Year 2
	FIFO	LIFO	Weighted Average
Assets
Cash *	$42,048	$42,268	$42,165
Inventory	5,720	5,170	5,428
Total Assets	$47,768	$47,438	$47,593
Stockholder's equity
Common stock	15,500	15,500	15,500
Retained earnings **	32,268	31,938	32,093
Total stockholder's equity	$47,768	$47,438	$47,593

Working notes:

* Cash = Beginning balance + sales - purchases - salaries expenses - income tax expenses

** Retained earnings = Beginning balance + Net income

WALL'S CHINA SHOP Statement of Cash Flow For Year Ended December 31, Year 2
	FIFO	LIFO	Weighted Average
Cash flow from operating activities
Cash receipts from customer	$78,540	$78,540	$78,540
Cash paid to supplier	- 31,840	- 31,840	- 31,840
Cash paid to employees (salary)	- 14,500	- 14,500	-14,500
Cash paid for income tax expense	- 9,152	- 8,932	- 9,035
Net cash flow from operating activities	23,048	23,268	23,165
Cash flow from investing activities	0	0	0
Cash flow from financing activities	0	0	0
Net change in cash	23,048	23,268	23,165
Beginning cash balance	19,000	19,000	19,000
Ending cash balance	$42,048	$42,268	$42,165