# P7-3.

## Presentation on theme: "P7-3."— Presentation transcript:

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: Transaction Units Amount Inventory, January 1, 2014 500 \$2,500 Purchase, January 12 600 3,600 Purchase, January 26 160 1,280 Sale (370) (250)

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.

Average Cost Date Units \$/Unit Total Jan 1, 2014 500 5 2500 Jan 12 600
3600 Jan 26 160 8 1280 Goods Available for Sale 1260 = 7380/1260 = = 5.86 7380 Sale (370) 5.86 (250) Cost of Goods Sold

Average Cost Average Cost Method Net Sales (370 + 250) x 16 = 9920
Cost of Goods Sold Gross Profit 9920 – =

FIFO Given Information Ending Inventory Cost of Goods Sold Jan 1, 2014
\$5 \$5 Jan 12 6 \$6 6 Jan 26 8 8 640 Units 620 Units \$4160 = 480 x x 8 \$3220 = 500 x x 6

FIFO Date Units \$/Unit Total Jan 1, 2014 500 \$ 5 \$ 2500 Jan 12 600 6
3600 Jan 26 160 8 1280 Goods Available for Sale 1260 7380 Cost of Goods Sold 3220

FIFO FIFO Net Sales (370 + 250) x 16 = 9920 Cost of Goods Sold 3220
Gross Profit 9920 – 3220 = 6700

LIFO Given Information Ending Inventory Cost of Goods Sold Jan 1, 2014
\$5 \$5 Jan 12 6 6 \$6 Jan 26 8 8 640 Units 620 Units \$3340 = 500 x x 6 \$4040 = 460 x x 8

LIFO Date Units \$/Unit Total Jan 1, 2014 500 \$ 5 \$ 2500 Jan 12 600 6
3600 Jan 26 160 8 1280 Goods Available for Sale 1260 7380 Cost of Goods Sold 4040

LIFO LIFO Net Sales (370 + 250) x 16 = 9920 Cost of Goods Sold 4040
Gross Profit 9920 – 4040 = 5880

Specific Identification
Given Information Ending Inventory Cost of Goods Sold Beg Inv: Jan 1, 2014 \$5 \$5 \$5 Jan 12 6 6 6 Jan 26 8 8 640 Units 620 Units \$4030 = 130 x x x 8 \$3350 = 370 x x 6

Specific Identification
Date Units \$/Unit Total Beg Inv: Jan 1, 2014 500 5 2500 Jan 12 600 6 3600 Jan 26 160 8 1280 Goods Available for Sale 1260 = 7380/1260 = = 5.86 7380 Sale (370) 5 (from Beg Inv) 1850 (250) 6 (from Jan 12) 1500 Cost of Goods Sold 3350

Specific Identification
Net Sales ( ) x 16 = 9920 Cost of Goods Sold 3350 Gross Profit 9920 – 3350 = 6570

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

Part 2 Higher Pretax Income Higher EPS
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

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

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

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

Part 4 Favourable cash flow FIFO Higher total ending balance