Fundamental Financial Accounting Concepts
Fundamental Financial Accounting Concepts
10th Edition
ISBN: 9781259918186
Author: Thomas P Edmonds, Christopher Edmonds, Frances M McNair, Philip R Olds
Publisher: McGraw-Hill Education
Question
Book Icon
Chapter 5, Problem 6AE

a. 1

To determine

Record the given transactions in general journal form and post it to T-accounts using the FIFO method.

a. 1

Expert Solution
Check Mark

Explanation of Solution

Journal:

Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system of Accounting.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.

Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

Ledger:

Ledger is the book, where the debit and credit entries recorded in the journal book are transferred to their relevant accounts. The entire accounts of the company are collectively called the ledger.

First-in-First-Out:

In First-in-First-Out method, the costs of the initially purchased items are considered as cost of goods sold, for the items which are sold first. The value of the ending inventory consists of the recent purchased items.

Record the given transactions in general journal form using FIFO as follows:

Journal
Date Account Title and Explanation Post Debit Credit
Ref. ($) ($)
April 1 Merchandise Inventory Table (2)   70,000  
  Cash     70,000
  (To record the purchase of inventory)      
         
October 1 Merchandise Inventory Table (2)   22,800  
  Cash     22,800
  (To record the purchase of inventory)      
       
  Cash Table (2)   243,000  
  Sales Revenue     243,000
  (To record the sales made)      
       
  Cost of Goods Sold Table (3)   93,400  
  Merchandise Inventory     93,400
  (To record the cost of goods sold)      
         
  Operating Expenses   41,500  
  Cash     41,500
  (To record the operating expenses incurred)      
         
  Income Tax Expense (1)   32,430  
  Cash     32,430
  (To record the income tax expenses incurred)      

Table (1)

Working notes:

Calculate total purchase:

Particular Unit Unit cost Total cost
Purchases:      
January 1 400 $30 $12,000
April 1 2,000 35 70,000
October 1 600 38 22,800
Goods Available for Sale 3,000   $104,800
Less: Cost of goods sold 2,700 90 243,000
Ending inventory 300    

Table (2)

Calculate cost of goods sold amount under FIFO:

Particular 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 (3)

Calculate income tax expense amount:

Income tax expenses=[salescost of goodssoldoperating expense]×30100=$243,000$93,400$41,500×30100=$108,100×30100=$32,430 (1)

Post the given transactions to T-accounts using FIFO as follows:

Cash                  
Bal 75,000    
Year 2 243,000 1-Apr 70,000
1-Oct 22,800
    Year 2 41,500
    Year 2 32,430
Bal. 151,270  
Sales revenue                  
    Year 2 243,000
    Bal. 243,000
Merchandise Inventory                  
Bal 12,000    
1-Apr 70,000    
1-Oct 22,800 Year 2 93,400
Bal. 11,400  
Cost of goods sold                    
Year 2 93,400    
Bal. 93,400    
Common stock                
    Bal 50,000
    Bal. 50,000
Retained earnings                  
    Bal 37,000
    Bal. 37,000
Operating expenses
Year 2 41,500    
Bal. 41,500    

Income tax expenses

Year 2 32,430    
Bal. 32,430    

a. 2

To determine

Record the given transactions in general journal form and post it to T-accounts using the LIFO method.

a. 2

Expert Solution
Check Mark

Explanation of Solution

Last-in-Last-Out:

In Last-in-First-Out method, the costs of last purchased items are considered as the cost of goods sold, for the items which are sold first. The value of the closing stock consists of the initial purchased items.

Record the given transactions in general journal form using LIFO as follows:

Journal
Date Account Title and Explanation Post Debit Credit
Ref. ($) ($)
April 1 Merchandise Inventory Table (2)   70,000  
  Cash     70,000
  (To record the purchase of inventory)      
         
October 1 Merchandise Inventory Table (2)   22,800  
  Cash     22,800
  (To record the purchase of inventory)      
       
  Cash Table (2)   243,000  
  Sales Revenue     243,000
  (To record the sales made)      
       
  Cost of Goods Sold Table (5)   93,400  
  Merchandise Inventory     93,400
  (To record the cost of goods sold)      
         
  Operating Expenses   41,500  
  Cash     41,500
  (To record the operating expenses incurred)      
         
  Income Tax Expense (2)   32,430  
  Cash     32,430
  (To record the income tax expenses incurred)      

Table (4)

Working notes:

Calculate cost of goods sold amount under LIFO:

Particular 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 (5)

Calculate income tax expense amount:

Income tax expenses=[salescost of goodssoldoperating expense]×30100=$243,000$95,800$41,500×30100=$105,700×30100=$31,710 (2)

Post the given transactions to T-accounts using LIFO as follows:

Cash                  
Bal 75,000    
Year 2 243,000 1-Apr 70,000
1-Oct 22,800
    Year 2 41,500
    Year 2 31,710
Bal. 151,990  
Sales revenue                  
    Year 2 243,000
    Bal. 243,000
Merchandise Inventory                  
Bal 12,000    
1-Apr 70,000    
1-Oct 22,800 Year 2 95,800
Bal. 9,000  
Cost of goods sold                    
Year 2 95,800    
Bal. 95,800    
Common stock                
    Bal 50,000
    Bal. 50,000
Retained earnings                  
    Bal 37,000
    Bal. 37,000
Operating expenses
Year 2 41,500    
Bal. 41,500    

Income tax expenses

Year 2 31,710    
Bal. 31,710    

b.

To determine

Prepare income statement using FIFO and LIFO.

b.

Expert Solution
Check Mark

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, Year 2
Particulars $
Sales Table (2) $243,000
Less: Cost of Goods Sold Table (3) 93,400
Gross Margin 149,600
Less: Operating Expenses 41,500
Income Before Tax 108,100
Less: Income Tax Expense (1) 32,430
Net Income $75,670

Table (5)

Prepare income statement using LIFO as follows:

Company P
Income Statements (LIFO)
For the Year Ended December 31, Year 2
Particulars $
Sales Table (2) $243,000
Less: Cost of Goods Sold Table (5) 95,800
Gross Margin 147,200
Less: Operating Expenses 41,500
Income Before Tax 105,700
Less: Income Tax Expense (2) 31,710
Net Income $73,990

Table (6)

c.

To determine

Ascertain the amount of income tax that Company P Would pay using each cost flow method.

c.

Expert Solution
Check Mark

Explanation of Solution

  • 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.

d.

To determine

Ascertain the cash flow from operating activities under FIFO and LIFO.

d.

Expert Solution
Check Mark

Explanation of Solution

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:    
Cash Inflow from Customers $243,000 $243,000
Less: Cash Outflow for Inventory (3) 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 (7)

Working notes:

Calculate cash outflow for Inventory amount:

Cash paid for inventory=[Purchased made on April 1+Purchased made on october 1]=$70,000+$22,800=$92,800 (3)

e.

To determine

Describe why does the cash flow from operating activities differs between FIFO and LIFO.

e.

Expert Solution
Check Mark

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 cause a greater cash flow for tax expense.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Knowledge Booster
Background pattern image
Recommended textbooks for you
Text book image
FINANCIAL ACCOUNTING
Accounting
ISBN:9781259964947
Author:Libby
Publisher:MCG
Text book image
Accounting
Accounting
ISBN:9781337272094
Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:Cengage Learning,
Text book image
Accounting Information Systems
Accounting
ISBN:9781337619202
Author:Hall, James A.
Publisher:Cengage Learning,
Text book image
Horngren's Cost Accounting: A Managerial Emphasis...
Accounting
ISBN:9780134475585
Author:Srikant M. Datar, Madhav V. Rajan
Publisher:PEARSON
Text book image
Intermediate Accounting
Accounting
ISBN:9781259722660
Author:J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:McGraw-Hill Education
Text book image
Financial and Managerial Accounting
Accounting
ISBN:9781259726705
Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:McGraw-Hill Education