a.
Prepare income statement using FIFO and LIFO.
a.
Explanation of Solution
Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.
Prepare income statement using FIFO as follows:
Company P | |
Income Statements (FIFO) | |
For the Year Ended December 31, 2016 | |
Particulars | Amount |
Sales revenue (1) | $243,000 |
Less: Cost of Goods Sold Table (2) | ($93,400) |
Gross Margin | $149,600 |
Less: Operating Expenses | ($41,500) |
Income Before Tax | $108,100 |
Less: Income Tax Expense (3) | ($32,430) |
Net Income | $75,670 |
Table (1)
Working Note:
(1) Calculate the sales revenue.
(2) Calculate cost of goods sold amount under FIFO:
Computation of cost of goods sold | |||
Particulars | Unit | Unit cost | Total cost |
Purchases: | |||
January 1 | 400 | $30 | $12,000 |
April 1 | 2,000 | $35 | $70,000 |
October 1 | 300 | $38 | $11,400 |
Cost of goods sold | 2,700 | $93,400 |
Table (2)
(3) Calculate income tax expense amount:
Prepare income statement using LIFO as follows:
Company P | |
Income Statements (LIFO) | |
For the Year Ended December 31, 2016 | |
Particulars | Amount |
Sales revenue (4) | $243,000 |
Less: Cost of Goods Sold Table (4) | ($95,800) |
Gross Margin | $147,200 |
Less: Operating Expenses | ($41,500) |
Income Before Tax | $105,700 |
Less: Income Tax Expense (6) | ($31,710) |
Net Income | $73,990 |
Table (3)
Working Note:
(4) Calculate the sales revenue.
(5) Calculate cost of goods sold amount under LIFO:
Computation of cost of goods sold | |||
Particulars | Unit | Unit cost | Total cost |
Purchases: | |||
October 1 | 600 | $38 | $22,800 |
April 1 | 2,000 | 35 | 70,000 |
January 1 | 100 | 30 | 3,000 |
Cost of goods sold | 2,700 | 95,800 |
Table (4)
(6) Calculate income tax expense amount:
b.
Ascertain the amount of income tax that Company P Would pay using each cost flow method.
b.
Explanation of Solution
Income Tax Expenses: The expenses which are related to the taxable income of the individuals and business entities for an accounting period, and are recognized by them for the purpose of federal government and state government tax are called as income tax expenses.
- The amount of income tax that Company P would pay under FIFO cost method is $32,430.
- The amount of income tax that Company P would pay under LIFO cost method is $31,710.
c.
Ascertain the cash flow from operating activities under FIFO and LIFO.
c.
Explanation of Solution
Cash flows from operating activities: This section of cash flow statement provides information about the cash received or cash paid in day-to-day operating activities of a company.
Ascertain the cash flow from operating activities under FIFO and LIFO as follows:
Company P | ||
Cash Flows from Operating Activities | ||
Particulars | FIFO | LIFO |
Cash Flows From Operating Activities: | ||
$243,000 | $243,000 | |
Less: | ($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 |
Table ()
Working notes:
3. Calculate cash outflow for Inventory amount:
d.
Describe why does the cash flow from operating activities differs between FIFO and LIFO.
d.
Explanation of Solution
Due to the difference in the amount of income tax paid under the two methods, the cash flow from operating activities differs between FIFO and LIFO. Under FIFO, the taxable income would be greater. Hence, the amount of income tax paid would be higher which causes greater cash flow for tax expense.
Want to see more full solutions like this?
Chapter 5 Solutions
Survey Of Accounting
- Power Company's income statement for 2021 is given below. If inventory balances are 5000 in 2021 and 9000 in 2020, and if accounts payables balances are 7000 in 2021 and 12000 in 2020. Which of the following is cash payments for COGS (cash inputs)? Sales 75,000 -COGS 55,000 Gross Profit 20,000 -Operating Expenses 8,000 Operating Profit 12,000 -Interest Expense 2,000 Profit before Tax 10,000 -Tax 3,000 Net Profit 7,000 Select one: a. 54000 b. 56000 c. 59000 d. 63000 Clear my choice ◄ CLO ASSESSMENTarrow_forwardPresented below is information related to Sheridan Corp. for the year 2020. Net sales $ 1,196,000 Write-off of inventory due to obsolescence $ 73,600 Cost of goods sold 717,600 Depreciation expense omitted by accident in 2019 50,600 Selling expenses 59,800 Casualty loss 46,000 Administrative expenses 44,160 Cash dividends declared 41,400 Dividend revenue 18,400 Retained earnings at December 31, 2019 901,600 Interest revenue 6,440 Effective tax rate of 20% on all items SHERIDAN CORP.Income Statement For the Year Ended December 31, 2020 Particulars Amount Amount Net Sales $11,96,000 Cost of Good Sold $7,17,600 Gross Profit $4,78,400 Operating Expenses Selling Expenses $59,800 Administrative Expenses $44,160 Total Operating Expenses $1,03,960 Income from Operations $3,74,440 Other Revenues and Gains Dividend Revenue $18,400 Interest $6,440 $24,840…arrow_forwardPresented below is information related to Sheridan Corp. for the year 2020. Net sales $1,196,000 Write-off of inventory due to obsolescence $73,600 Cost of goods sold 717,600 Depreciation expense omitted by accident in 2019 50,600 Selling expenses 59,800 Casualty loss 46,000 Administrative expenses 44,160 Cash dividends declared 41,400 Dividend revenue 18,400 Retained earnings at December 31, 2019 901,600 Interest revenue 6,440 Effective tax rate of 20% on all items Prepare a multiple-step income statement for 2020. Assume that 69,920 shares of common stock are outstanding for the entire year. (Round earnings per share to 2 decimal places, e.g. 1.49.)arrow_forward
- David’s business makes an operating profit of £29 975 in the year ended 31 December 2019, after deducting £7668 for depreciation. On 31 December 2019, her statement of financial position showed inventory of £33 250, receivables and prepayments of £26 772 and payables of £35 556. On 31 December 2018, the corresponding figures were inventory £34 490, receivables and prepayments £22 894 and payables £29 493. What is the net cash inflow from operating activities to be included in David's statement of cashflow for the year ended 31 December 2019. a. £34,218 b. £33,400 c. £41,068 d. £38,588arrow_forwardThe Oakland Mills Company has disclosed the following financial information in its annual reports for the period ending March 31, 2011: sales of $1,593,952, costs of goods sold of $635,632.29, depreciation expenses of $175,000, and interest expenses of $89,575. Assume that the firm has a tax rate of 35 percent. What is the company's net income? Set up an income statement to answer the question. (Round answers to 2 decimal places, e.g. 15.25) Choose the correct one: Amount Revenues ________________ Earnings before interest, taxes, depreciation, and amortization net income depreciation Cost of goods sold Earnings before interest and taxes Interest Earnings before taxes Taxes…arrow_forwardHealthy Spices Ltd has prepared a statement of profit or loss for the 12-month reporting period ended 30 June 2021 on a cash basis, showing a $64 800 profit. The cash-based statement shows the following. Additional information The accounts receivable and accounts payable balances at the start of the reporting period were $24 600 and $14 700 respectively. At the end of the reporting period, Fed X had accounts receivable of $31 800 and accounts payable of $29 640. The opening inventory was $48 000 and the closing inventory $57 000. An advertising invoice of $4440 had not been paid. The business has equipment that cost $60 600. It has a useful life of five years and an expected salvage value of $6600. The insurance expense represents the 12-month premium on a policy that was taken out on 30 April. Required Prepare an accrual-based statement of profit or loss for Healthy Spices Ltd for the year ended 30 June (you are advised to show any workings).arrow_forward
- For the period from 2016 through 2016, the Charlie Company had net sales of $500,000 and a gross profit of $200,000. During the first quarter of 2018, the company made purchases of $19,500 and recorded sales of $47,500. The inventory value at the beginning of the year was 15,500. What is the estimated cost of Charlie's inventory on March 31, 2018, using the gross profit method?arrow_forwardDuring January 2020, Hussain & Co made sales for an amount of OMR 155,000 which made a gross profit of OMR 40,000. Calculate the Purchases if the opening inventory and closing inventory are 30,000 and 18,000 respectivelyarrow_forwardDuring 2018, Raines Umbrella Corporation had sales of $749,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $576,000, $101,000, and $131,000, respectively. In addition, the company had an interest expense of $99,000 and a tax rate of 40 percent. (Ignore any tax loss carryback or carryforward provisions.) Assume Raines Umbrella Corporation paid out $16,000 in cash dividends. If spending on net fixed assets and net working capital was zero, and if no new stock was issued during the year, what is the firm's net new long-term debt?arrow_forward
- Tanesha D Company Limited makes sales of $6,900,000 over the 2019 fiscal period.If the company states the following financials: Costs of goods sold $4,200,000.00 Depreciation expenses $235,000.00 Interest expenses $85,000.00 Preferred stocks dividends $10,800.00 Use the figures above to complete the income statement on the next page and perform calculations. Tanesha D Company Limited Income Statement & calculate the current ratioarrow_forwardDuring 2018, Raines Umbrella Corp. had sales of $742,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $573,000, $104,000, and $132,000, respectively. In addition, the company had an interest expense of $97,000 and a tax rate of 35 percent. (Ignore any tax loss carryback or carryforward provisions.) Assume Raines Umbrella Corp. paid out $19,000 in cash dividends. If spending on net fixed assets and net working capital was zero, and if no new stock was issued during the year, what is the firm's net new long-term debt?arrow_forwardOman Oasis Company provided the following information for the year ended 31st December 2017. Inventory- RO 56,000 Long term debt – RO 74,500 Good will – RO 25,000 Account receivables – RO 38,400 Account payable – RO 47,800 Machinery – RO 67,000 Deferred income taxes – RO 14,500 Fixtures and fittings – RO 26,000 Cash – RO 12,500 Shareholder’s equity – RO 90,000 Short term debt – RO 5,600 Other current assets – RO 7,500 Analyze the above information and prepare the Balance sheet of Oman Oasis Company for the year ended 31st December 2017arrow_forward
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning