Question

Crystal Apple Sales Company began 2014 with cash of $2,000, inventory of $3,600 (200 crystal apples that cost $18 each), $2,500 of common stock, and $3,100 of retained earnings. The following events occurred during 2014.

1. Crystal Apple purchased additional inventory twice during 2018. The first purchase consisted of 800 apples that cost $20 each, and the second consisted of 1,200 apples that cost $24 each. The purchases were on account.
2. The company sold 2,040 apples for cash at a selling price of $40 each.
3. The company paid $44,800 cash on accounts payable for inventory purchases.
4. Crystal Apple paid $26,000 cash for operating expenses.
5. Assume an income tax rate of 30 percent. Crystal Apple paid income tax expense in cash.
Required:
a. Determine the ending inventory and cost of goods sold using the three different cost flow assumptions: FIFO, LIFO, and Weighted Average.
b. Prepare an income statement, a balance sheet, and a statement of cash flows under each of the three cost flow assumptions.

Answer 1

Answer and Explanation:

a. The computation of ending inventory and cost of goods sold using the three different cost flow assumptions: FIFO, LIFO, and Weighted Average is shown below:-

Cost of goods sold = (200 × $18) + (800 × $20) + (1,040 × (2,040-200-800)

= (200 × $18) + (800 × $20) + (1,040 × $24)

= $3,600 + $16,000 + $24,960

= $44,560

Ending Inventory Under FIFO = (1,200 - 1,040) × (2,040-200-800)

= 160 × $24

= $3,840

Under LIFO method

Cost of goods sold is

= (1,200 × $24) + (800 × $20) + (40 × $18)

= $28,800 + $16,000 + $720

= $45,520

Ending Inventory Under LIFO is

= (200 - 40) × $18

= 160 × $18

= $2,880

Weighted Average cost flow Assumption

Weighted Average cost per apple = Cost of Beginning inventory and purchase ÷ Total apple available

Cost of Beginning inventory and purchases is

= (200 × $18) + (800 × $20) + (1,200 × $24)

= $3,600 + $16,000 + $28,800

= $48,400

Total apples available is

= 200 + 800 + 1,200

= 2,200

Weighted Average cost per apple is

= $48,400 ÷ 2,200

= $22

Cost of goods sold is

= 2,040 × $22

= $44,880

Ending Inventory is

= 160 × $22

= $3,520

b. The Preparation of income statement, a balance sheet, and a statement of cash flows under each of the three cost flow assumptions is prepared below:-

Income Statement Amount

Sales (2,040 × $40) $81,600

Less: Cost of goods sold ($44,560)

Gross Profit $37,040

Less: Operating Expenses ($26,000)

Income before income taxes $11,040

Less: Income tax (30% × $11,280) ($3,312)

Net Income $7,728

Balance Sheet

Assets

Cash $9,488

Inventory $3,840

Total Assets $13,328

Liabilities and Stockholder's Equity

Common Stock $2,500

Retained Earnings $10,828

Total Liabilities and Equity $13,328

Working note

cash = (opening + Sales - Purchases - Operating expenses - Income tax expenses )

= $2,000 + $81,600 - $44,800 - $26,000 - $3,312

= $9,488

Retained earning = (Opening + Net Income)

= $3,100 + $7,728

= $10,828

Statement of Cash Flow

Cash Flow from Operating Activities

Cash Sales $81,600

Payment to Accounts Payable ($44,800)

Operating Expenses ($26,000)

Income tax paid ($3,312)

Net Increase in cash and

cash equivalents $7,488

Add: Opening Cash and

cash equivalents $2,000

Closing Cash and cash equivalents $9,488

LIFO cost flow Assumption

Income Statement

Sales (2,040 × $40) $81,600

Less: Cost of goods sold ($45,520)

Gross Profit $36,080

Less: Operating Expenses ($26,000)

Income before income taxes $10,080

Less: Income tax (30% × $10,080) ($3,024)

Net Income $7,056

Balance Sheet

Assets

Cash $9,776

Inventory $2,880

Total Assets $12,656

Liabilities and Stockholder's Equity

Common Stock $2,500

Retained Earnings $10,156

Total Liabilities and Equity $12,656

Working note:-

Cash = (opening + Sales - Purchases payment - Operating expenses -Income tax expenses)

= $2,000 + $81,600 - $44,800 - $26,000 - $3,024

= $9,776

Retained earning = (Opening + Net Income)

= $3,100 + $7,056

= $10,156

Statement of Cash Flows

Cash Flow from Operating Activities

Cash Sales $81,600

Payment to Accounts Payable ($44,800)

Operating Expenses ($26,000)

Income tax paid ($3,024)

Net Increase in cash and

cash equivalents $7,776

Add: Opening Cash and

cash equivalents $2,000

Closing Cash and cash equivalents $9,776

Weighted Average cost flow Assumption

Income Statement

Sales (2,040 × $40) $81,600

Less: Cost of goods sold ($44,880)

Gross Profit $36,720

Less: Operating Expenses ($26,000)

Income before income taxes $10,720

Less: Income tax (30% × $10,720) ($3,216)

Net Income $7,504

Balance Sheet

Assets

Cash $9,584

Inventory $3,520

Total Assets $13,104

Liabilities and Stockholder's Equity

Common Stock $2,500

Retained Earnings $10,604

Total Liabilities and Equity $13,104

Working note

Cash = opening + Sales - Purchases payment - Operating expenses - Income tax expenses )

= $2,000 + $81,600 - $44,800 - $26,000 - $3,126

= $9,584

Retained earning = (Opening + Net Income)

= $3,100 + $7,504

= $10,604

Statement of Cash Flows

Cash Flow from Operating Activities

Cash Sales $81,600

Payment to Accounts Payable ($44,800)

Operating Expenses ($26,000)

Income tax paid ($3,216)

Net Increase in cash and

cash equivalents $7,584

Add: Opening Cash and

cash equivalents $2,000

Closing Cash and

cash equivalents $9,584