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

Accounting for Inventories

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

The following information pertains to Stanley Company for Year 2:

Beginning inventory 90 units @ $15
Units purchased 320 units @ $19

Ending inventory consisted of 40 units. Stanley sold 370 units at $30 each. All purchases and sales were made with cash.

Required
a. Compute the gross margin for Stanley Company using the following cost flow assumptions:
(1) FIFO, (2) LIFO, and (3) weighted average.
b. What is the dollar amount of difference in net income between using FIFO versus LIFO? (Ignore income tax considerations.)
c. Determine the cash flow from operating activities, using each of the three cost flow assumptions listed in Requirement a. Ignore the effect of income taxes. Explain why these cash flows have no differences.

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

Scott Sales had the following transactions for jackets in Year 1, its first year of operations:

Jan. 20 Purchased 80 units @ $15 = $1,200
Apr. 21 Purchased 420 units @ $16 = 6,720
July 25 Purchased 250 units @ $20 = 5,000
Sept. 19 Purchased 150 units @ $22 = 3,300

During the year, Scott Sales sold 830 jackets for $40 each.

Required
a. Compute the amount of ending inventory Scott 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 using (1) FIFO, (2) LIFO, and (3) weighted average. 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 5-6B Income tax effect of shifting from FIFO to LIFO

The following information pertains to the inventory of the Bryant Company:

Jan. 1 Beginning Inventory 300 units @ $25
Apr. 1 Purchased 2,800 units @ $30
Oct. 1 Purchased 1,000 units @ $32

During the year, Bryant sold 3,500 units of inventory at $50 per unit and incurred $21,000 of operating expenses. Bryant currently uses the FIFO method but is considering a change to LIFO. All transactions are cash transactions. Assume a 30 percent income tax rate. Bryant started the period with cash of $36,000, inventory of $7,500, common stock of $20,000, and retained earnings of $23,500.

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 Bryant would save if it changed cost flow methods.
d. Determine the cash flow from operating activities under FIFO and LIFO.
e. Explain why cash flow from operating activities is lower under FIFO when that cost flow method produced the higher gross margin.