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P7-3. At the end of January 2014, the records of Rizal Industries showed the following for a particular item that sold at $16 per unit: TransactionUnitsAmount.

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Presentation on theme: "P7-3. At the end of January 2014, the records of Rizal Industries showed the following for a particular item that sold at $16 per unit: TransactionUnitsAmount."— Presentation transcript:

1 P7-3

2 At the end of January 2014, the records of Rizal Industries showed the following for a particular item that sold at $16 per unit: TransactionUnitsAmount Inventory, January 1, $2,500 Purchase, January ,600 Purchase, January ,280 Sale(370) Sale(250)

3 Part 1 Assuming the use of a periodic inventory system, prepare a summarized income statement through gross profit for the month of January under each method of inventory: (a) average cost, (b) FIFO, (c) LIFO, (d) specific identification. For specific identification, assume that the first sales was selected from the beginning inventory and the second sale was selected from the January 12 purchase. Round the average cost per unit to the nearest cent. Show the inventory computation in detail.

4 Average Cost DateUnits$/UnitTotal Jan 1, Jan Jan Goods Available for Sale 1260= 7380/1260 = = Sale(370) Sale(250) Cost of Goods Sold

5 Average Cost Average Cost Method Net Sales( ) x 16 = 9920 Cost of Goods Sold Gross Profit9920 – =

6 FIFO Given InformationEnding Inventory Cost of Goods Sold Jan $ Units620 Units $4160 = 480 x x 8 $3220 = 500 x x 6

7 FIFO DateUnits$/UnitTotal Jan 1, $ 5$ 2500 Jan Jan Goods Available for Sale Cost of Goods Sold3220

8 FIFO Net Sales( ) x 16 = 9920 Cost of Goods Sold3220 Gross Profit9920 – 3220 = 6700

9 LIFO Given InformationEnding Inventory Cost of Goods Sold Jan $5 $ Units620 Units $3340 = 500 x x 6 $4040 = 460 x x 8

10 LIFO DateUnits$/UnitTotal Jan 1, $ 5$ 2500 Jan Jan Goods Available for Sale Cost of Goods Sold4040

11 LIFO Net Sales( ) x 16 = 9920 Cost of Goods Sold4040 Gross Profit9920 – 4040 = 5880

12 Specific Identification Given InformationEnding Inventory Cost of Goods Sold Beg Inv: Jan 1, $ Units620 Units $4030 = 130 x x x 8 $3350 = 370 x x 6

13 Specific Identification DateUnits$/UnitTotal Beg Inv: Jan 1, Jan Jan Goods Available for Sale 1260= 7380/1260 = = Sale(370)5 (from Beg Inv)1850 Sale(250)6 (from Jan 12)1500 Cost of Goods Sold3350

14 Specific Identification Net Sales( ) x 16 = 9920 Cost of Goods Sold3350 Gross Profit9920 – 3350 = 6570

15 Part 2 Of FIFO and LIFO, which method would result in the higher pretax income? Which would result in higher EPS?

16 Part 2 Higher Pretax Income – FIFO (higher gross profit + assume profitable) Higher EPS – EPS = Net income / average outstanding shares of common stock – Higher pretax income = higher net income (assuming taxes is fixed percentage of income) – FIFO

17 Part 3 Of FIFO and LIFO, which method would result in the lower income tax expense? Explain, assuming a 30% average tax rate.

18 Part 3 Lower income tax expense – LIFO lower pretax income, and 30% average tax rate – Comparison Assuming other expenses are $1000 FIFO: $ $1000 = $ % of $5700 = $1710 LIFO: $ $1000 = $ % of $4880 = $1464

19 Part 4 Of FIFO and LIFO, which method would produce the more favourable cash flow? Explain.

20 Part 4 Favourable cash flow – FIFO – Higher total ending balance


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