a.
Prepare income statement using FIFO and LIFO.
a.
Explanation of Solution
Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.
Prepare income statement using FIFO as follows:
Company P | |
Income Statements (FIFO) | |
For the Year Ended December 31, 2016 | |
Particulars | Amount |
Sales revenue (1) | $243,000 |
Less: Cost of Goods Sold Table (2) | ($93,400) |
Gross Margin | $149,600 |
Less: Operating Expenses | ($41,500) |
Income Before Tax | $108,100 |
Less: Income Tax Expense (3) | ($32,430) |
Net Income | $75,670 |
Table (1)
Working Note:
(1) Calculate the sales revenue.
(2) Calculate cost of goods sold amount under FIFO:
Computation of cost of goods sold | |||
Particulars | Unit | Unit cost | Total cost |
Purchases: | |||
January 1 | 400 | $30 | $12,000 |
April 1 | 2,000 | $35 | $70,000 |
October 1 | 300 | $38 | $11,400 |
Cost of goods sold | 2,700 | $93,400 |
Table (2)
(3) Calculate income tax expense amount:
Prepare income statement using LIFO as follows:
Company P | |
Income Statements (LIFO) | |
For the Year Ended December 31, 2016 | |
Particulars | Amount |
Sales revenue (4) | $243,000 |
Less: Cost of Goods Sold Table (4) | ($95,800) |
Gross Margin | $147,200 |
Less: Operating Expenses | ($41,500) |
Income Before Tax | $105,700 |
Less: Income Tax Expense (6) | ($31,710) |
Net Income | $73,990 |
Table (3)
Working Note:
(4) Calculate the sales revenue.
(5) Calculate cost of goods sold amount under LIFO:
Computation of cost of goods sold | |||
Particulars | Unit | Unit cost | Total cost |
Purchases: | |||
October 1 | 600 | $38 | $22,800 |
April 1 | 2,000 | 35 | 70,000 |
January 1 | 100 | 30 | 3,000 |
Cost of goods sold | 2,700 | 95,800 |
Table (4)
(6) Calculate income tax expense amount:
b.
Ascertain the amount of income tax that Company P Would pay using each cost flow method.
b.
Explanation of Solution
Income Tax Expenses: The expenses which are related to the taxable income of the individuals and business entities for an accounting period, and are recognized by them for the purpose of federal government and state government tax are called as income tax expenses.
- The amount of income tax that Company P would pay under FIFO cost method is $32,430.
- The amount of income tax that Company P would pay under LIFO cost method is $31,710.
c.
Ascertain the cash flow from operating activities under FIFO and LIFO.
c.
Explanation of Solution
Cash flows from operating activities: This section of cash flow statement provides information about the cash received or cash paid in day-to-day operating activities of a company.
Ascertain the cash flow from operating activities under FIFO and LIFO as follows:
Company P | ||
Cash Flows from Operating Activities | ||
Particulars | FIFO | LIFO |
Cash Flows From Operating Activities: | ||
$243,000 | $243,000 | |
Less: | ($92,800) | ($92,800) |
Cash Outflow for Operating Expense | ($41,500) | ($41,500) |
Cash Outflow for Income Tax Expense | ($32,430) | ($31,710) |
Net Cash Flow from Operating Activities | $76,270 | $76,990 |
Table ()
Working notes:
3. Calculate cash outflow for Inventory amount:
d.
Describe why does the cash flow from operating activities differs between FIFO and LIFO.
d.
Explanation of Solution
Due to the difference in the amount of income tax paid under the two methods, the cash flow from operating activities differs between FIFO and LIFO. Under FIFO, the taxable income would be greater. Hence, the amount of income tax paid would be higher which causes greater cash flow for tax expense.
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