Effect of inventory cost flow (FIFO, LIFO, and weighted average) on gross margin

Accounting for Inventories

Exercise 5-4A Effect of inventory cost flow (FIFO, LIFO, and weighted average) on gross margin

The following information pertains to Mason Company for Year 2:

Beginning inventory 90 units @ $40
Units purchased 310 units @ $45

Ending inventory consisted of 30 units. Mason sold 370 units at $90 each. All purchases and sales were made with cash. Operating expenses amounted to $4,100.

Required

a. Compute the gross margin for Mason Company using the following cost flow assumptions:
(1) FIFO, (2) LIFO, and (3) weighted average.

b. What is the amount of net income using FIFO, LIFO, and weighted average? (Ignore income tax considerations.)

c. Compute the amount of ending inventory using (1) FIFO, (2) LIFO, and (3) weighted average.

Exercise 5-5A Effect of inventory cost flow on ending inventory balance and gross margin

The Shirt Shop had the following transactions for T-shirts for Year 1, its first year of operations:

Jan. 20 Purchased 400 units @ $8 = $3,200
Apr. 21 Purchased 200 units @ $10 = $2,000
July 25 Purchased 280 units @ $13 = $3,640
Sept. 19 Purchased 90 units @ $15 = $1,350

During the year, The Shirt Shop sold 810 T-shirts for $20 each.

Required

a. Compute the amount of ending inventory The Shirt Shop would report on the balance sheet, assuming the following cost flow assumptions: (1) FIFO, (2) LIFO, and (3) weighted average.

b. Record the above transactions in general journal form and post to T-accounts assuming (1) FIFO, (2) LIFO, and (3) weighted-average methods. Use a separate set of journal entries and T-accounts for each method. Assume all transactions are cash transactions.

c. Compute the difference in gross margin between the FIFO and LIFO cost flow assumptions.

Exercise 5-6A Income tax effect of shifting from FIFO to LIFO

The following information pertains to the inventory of Parvin Company during Year 2:

Jan. 1 Beginning inventory 400 units @ $30
Apr. 1 Purchased 2,000 units @ $35
Oct. 1 Purchased 600 units @ $38

During Year 2, Parvin sold 2,700 units of inventory at $90 per unit and incurred $41,500 of operating expenses. Parvin currently uses the FIFO method but is considering a change to LIFO. All transactions are cash transactions. Assume a 30 percent income tax rate. Parvin started the period with cash of $75,000, inventory of $12,000, common stock of $50,000, and retained earnings of $37,000.

Required

a. Record the above transactions in general journal form and post to T-accounts using (1) FIFO and (2) LIFO. Use a separate set of journal entries and T-accounts for each method.

b. Prepare income statements using FIFO and LIFO.

c. Determine the amount of income tax that Parvin would pay using each cost flow method.

d. Determine the cash flow from operating activities under FIFO and LIFO.

e. Why is the cash flow from operating activities different under FIFO and LIFO?