| Template for a summarized income statement through gross profit for the month ended January 31, 2011, under four inventory valuation methods: (a) weighted average, (b) FIFO, (c) LIFO, and (d) specific identification. For Sheldon and Blair. |
| Learner: |
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| Sheldon and Blair |
| Partial Income Statement |
| For the Month Ended January 31, 2011 |
| | (a) Weighted Average | | (b) FIFO | | (c) LIFO | | (d) Specific Identification |
| Sales revenue1 | $14,000 | | $14,000 | | $14,000 | | $14,000 |
| Cost of goods sold2 | $4,642 | | $3,700 | | $4,220 | | $4,500 |
| Gross profit | $9,358 | | $10,300 | | $9,780 | | $9,500 |
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| Sheldon and Blair |
| Computations |
| 1Sales revenue: |
| 700 units @ $20 = | $14,000 |
| 2Cost of goods sold: |
| | Units | | Weighted Average | | FIFO | | LIFO | | Specific Identification |
| Beginning inventory | 500 | | $3,000 | | $3,000 | | $3,000 | | $3,000 |
| Purchases (net)3 | 800 | | $5,620 | | $5,620 | | $5,620 | | $5,620 |
| Goods available for sale | 1,300 | | $8,620 | | $8,620 | | $8,620 | | $8,620 |
| Ending inventory4 | 600 | | $3,978 | | $4,920 | | $4,400 | | $4,120 |
| Cost of goods sold | 700 | | $4,642 | | $3,700 | | $4,220 | | $4,500 |
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| 3Purchases (net) |
| Purchase, January 12 | 600 | | $7.00 | | $4,200 |
| Purchase, January 26 | 200 | | $7.10 | | $1,420 |
| Totals | 800 | | | | $5,620 |
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| 4Ending inventory |
| (a) Weighted-average cost: | Units | | Amount |
| Beginning inventory | 500 | @$6 | $3,000 |
| Purchases3 | 800 | | $5,620 |
| | 1,300 | | $8,620 |
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| Average cost: |
| $8,620 ÷ 1,300 units = | 6.63 |
| Ending inventory: |
| 600 units × $6.63 = | $3,978 |
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| (b) LIFO | 200 | | units @ $7.10 | | $1,420 |
| | 500 | | units @ $7.00 | | $3,500 |
| | 700 | | | | $4,920 |
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| ©FIFO | 500 | | units @ $6.00 | | $3,000 |
| | 200 | | units @ $7.00 | | $1,400 |
| | 700 | | | | $4,400 |
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| (d) Specific identification: | 400 | | units @ $6.00 | | $2,400 |
| | 300 | | units @ $7.00 | | $2,100 |
| | 0 | | units @ $7.10 | | $0 |
| | 700 | | | | $4,120 |
| Of FIFO and LIFO, which method would result in the higher pretax income? Which would result in the higher EPS? |
| FIFO will result in a higher pretax profit. Which will in turn result in higher EPS. |
| Of FIFO and LIFO, which method would result in the lower income tax expense? Explain, assuming a 35 percent average tax rate. |
| LIFO will result in a lower income tax expense since the cost of production is higher in LIFO than in FIFO |
| FIFO = Gross profit × .35 |
| LIFO = Gross profit × .35 |
| Of FIFO and LIFO, which method would produce the more favorable cash flow? Explain. |
| FIFO will produce a more favourable cash flow since it results in a higher net profit. Further there is a high chance of some products getting obsolete thereby leading to loses in LIFO due to expiry. |
| End of worksheet |
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assessment_6.xls
