Acct 2210 Zeigler: Demo Problem 5-2 - Inventory Cost Flows

Acct 2210 Zeigler: Demo Problem 5-2 - Inventory Cost Flows

Case Fact Pattern:

Crystal Apple Sales Company began 2015 with cash of $2,000, inventory of $3,600 (200 crystal apples that cost $18 each), $2,500 of common stock, and $3,100 of retained earnings. The following events occurred during 2015.

1.Crystal Apple purchased additional inventory twice during 2015. The first purchase consisted of 800 apples that cost $20 each, and the second consisted of 1,200 apples that cost $24 each. The purchases were on account.

2.The company sold 2,040 apples for cash at a selling price of $40 each.

3.The company paid $44,800 cash on accounts payable for inventory purchases.

4.Crystal Apple paid $26,000 cash for operating expenses.

5.Assume an income tax rate of 30 percent. Crystal Apple paid income tax expense in cash.

Required:

a.Record the events in ledger T-accounts using the three different cost flow assumptions: FIFO, LIFO, and weighted average (see attached).

b.Prepare an income statement, a balance sheet, and a statement of cash flows under each of the three cost flow assumptions (see last page).

c. Class Discussion (address these questions *after* completing parts “a” & “b” above:

1) Which method produces the “most accurate” Income Statement?

2) Which method produces the “most accurate” Balance Sheet?

3) How is the Statement of Cash Flows affected by the choice of Inventory Cost Flow used?

Inventory Summary: Determiningthe Cost of Goods AVAILABLE for sale

Complete this first to determine the “Cost of Goods available for sale”:

This analysis applies regardless of the inventory “Cost flow assumption” used.

Crystal Apple’s 2015 inventory will contain three “inventory layers”:

Units / Cost per Unit / Total Cost
Beginning balance / x / = / $
First purchase / x / =
Second purchase / ______/ x / = / ______
Total Cost of Goods available for Sale

Demo Problem 5-2 - FIFO Workpaper part a. Ledger T-accounts

Ledger T-Accounts ─ FIFO Cost Flow
Cash / Accounts Payable / Common Stock
Bal. 2,000 / 2,500Bal.
Inventory / Retained Earnings
Bal. 3,600 / 3,100Bal.
Sales Revenue
Cost of Goods Sold
Operating Expenses
Income Tax Expense

Demo Problem 5-2 - LIFO Workpaper, part a. Ledger T-accounts

Ledger T-Accounts ─ LIFO Cost Flow
Cash / Accounts Payable / Common Stock
Bal. 2,000 / 2,500Bal.
Inventory / Retained Earnings
Bal. 3,600 / 3,100Bal.
Sales Revenue
Cost of Goods Sold
Operating Expenses
Income Tax Expense

Demo Problem 5-2 – Weighted AVG Workpaper, part a. Ledger T-accts

Ledger T-Accounts ─ Weighted Average Cost Flow
Cash / Accounts Payable / Common Stock
Bal. 2,000 / 2,500Bal.
.
Inventory / Retained Earnings
Bal. 3,600 / 3,100Bal.
Sales Revenue
Cost of Goods Sold
Operating Expenses
Income Tax Expense

Demonstration Problem 5-2 Workpaper, part b. Financial Statements

Crystal Apple Sales Company
Comparative Financial Statements
Income Statements for the Year Ended December 31, 2015
FIFO / LIFO / Wt. Avg.
Sales
Cost of goods sold
Gross margin
Operating expenses
Income before taxes (IBT)
Income tax expense (IBT x .30)
Net income
Balance Sheets at December 31, 2015
Assets / FIFO / LIFO / Wt. Avg.
Cash / $ / $ / $
Inventory
Total assets
Stockholders’ equity
Common Stock / $ 2,500 / $ 2,500 / $ 2,500
Retained Earnings
Total stockholders’ equity
Statements of Cash Flows for the Year Ended December 31, 2015
Cash flow from oper. activities / FIFO / LIFO / Wt. Avg.
Cash inflow from customers
Cash outflow for inventory
Cash outflow for oper. exp.
Cash outflow for income taxes
Net cash inflow from oper. act.
Cash flow from investing act.
Cash flow from financing act.
Net increase in cash
Beginning cash balance
Ending cash balance