Acct 2210 Zeigler - Chp 5 Demo #1 Solution

Introduction to Inventory Valuation & “Cost Flow Assumptions”

Inventory Valuation & Costing Issues:

John Smith purchased two toy cars to resell. The cars were identical in every respect except that John purchased them at different times for different costs. The first car purchased cost $25. The second one purchased cost $31. John sold one of the cars for $40 cash. John’s cash operating expenses (i.e. S,G&A) were $5. Based on this, and an income tax rate of 30%, what was John’s net income?

Different answers will result depending on the chosen “Cost Flow assumption”

INCOME STATEMENT

FIFO / LIFO / WAVG
Sales Revenue (Cash) / $40 / $40 / $40
Cost of Goods Sold / (25) / (31) / (28)
Gross Margin/Gross Profit / 15 / $9 / $12
Oper Expenses (Cash) / (5) / (5) / (5)
Pre-tax Income / $10 / $4 / $7
Taxes Paid @ 30% / (3) / (1) / (2)
Net Income (Net Profit) / $ 7 / $ 3 / $ 5
CASH FLOW AVAIL TO REPLENISH $31 ITEM? / $ 32
($40-5-3) / $ 34
($40-5-1) / $33
($40-5-2)