Laker Company reported the following January purchases and sales data for its on

Question

Laker Company reported the following January purchases and sales data for its only product.

The Company uses a perpetual inventory system. For specific identification, ending inventory consists of 410 units, where 380 are from the January 30 purchase, 5 are from the January 20 purchase, and 25 are from beginning inventory.

Part 1. Complete comparative income statements for the month of January for Laker Company for the four inventory methods (LIFO, FIFO, Specific Identification, Weighted Average). Assume expenses are $2,250, and that the applicable income tax rate is 40%.

Part 2. Which method yields the highest net income?

LIFO

FIFO

Specific identification

Weighted average

Part 3. Does net income using weighted average fall between that using FIFO and LIFO?

No

Yes

Part 4. If costs were rising instead of falling, which method would yield the highest net income?

Specific identification

LIFO

Weighted average

FIFO

Date Activities Units Acquired at Cost Units sold at Retail Jan. 1 Beginning inventory 240 units @ $ 16.50 = $ 3,960 Jan. 10 Sales 190 units @ $ 25.50 Jan. 20 Purchase 170 units @ $ 15.50 = 2,635 Jan. 25 Sales 190 units @ $ 25.50 Jan. 30 Purchase 380 units @ $ 15.00 = 5,700 Totals 790 units $ 12,295 380 units

Explanation / Answer

1.

SPECFIC IDENT

WET. AVG.

2. Under LIFO Method the net Income is higest

3.Net Income using weighted average is falling Between FIFI and LIFO

4. If costs were rising instead of falling than under LIFO method would yield the highest net income

Calculation of Net Income LIFO FIFO SPECFIC IDENT WET. AVG. Sales (A) 9690 9690 9690 9690 Closing inventory (B) as Per W.N 1 6595 6165 6190 6381 Purchases   © 8335 8335 8335 8335 Opening Inventory (D) 3960 3960 3960 3960 Other Expenses   (E) 2250 2250 2250 2250 Net Income Before Tax (F) (A+B-C-D-E) 1740 1310 1335 1526 Tax@40%   (G) 696 524 534 610 Net Income Before Tax (F-G) 1044 786 801 916 Calculation of Closing stock- W.N. 1 LIFO FIFO

SPECFIC IDENT

WET. AVG.

Closing Inventory in Units 410 410 410 410 Cost P.U. 16.09 15.04 15.10 15.56 Closing Inventory in $ 6595 6165 6190 6381

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