Solution cost of goods available for sale h11005 4000

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Solution Cost of goods available for sale H11005 (4,000 H11003 $3) H11001 (6,000 H11003 $4) H11005 $36,000 Ending inventory H11005 10,000 H11002 7,000 H11005 3,000 units (a) FIFO: $36,000 H11002 (3,000 H11003 $4) H11005 $24,000 (b) LIFO: $36,000 H11002 (3,000 H11003 $3) H11005 27,000 (c) Average cost per unit: [(4,000 @ $3) H11001 (6,000 @ $4)] H11004 10,000 H11005 $3.60 Average-cost: $36,000 H11002 (3,000 H11003 $3.60) H11005 $25,200 The Navigator a19 Related exercise material: BE6-3, BE6-4, BE6-5, E6-3, E6-4, E6-5, E6-6, E6-7, E6-8, and DO IT! 6-2. PDF Watermark Remover DEMO : Purchase from to remove the watermark
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260 Chapter 6 Inventories Financial Statement and Tax Effects of Cost Flow Methods Each of the three assumed cost flow methods is acceptable for use. For ex- ample, Reebok International Ltd. and Wendy’s International currently use the FIFO method of inventory costing. Campbell Soup Company , Krogers , and Walgreen Drugs use LIFO for part or all of their inventory. Bristol-Myers Squibb , Starbucks , and Motorola use the average-cost method. In fact, a company may also use more than one cost flow method at the same time. Black & Decker Manufacturing Company , for example, uses LIFO for domestic inventories and FIFO for foreign inventories. Illustration 6-11 (in the margin) shows the use of the three cost flow methods in the 600 largest U.S. companies. The reasons companies adopt different inventory cost flow methods are varied, but they usually involve one of three factors: (1) income statement effects, (2) bal- ance sheet effects, or (3) tax effects. INCOME STATEMENT EFFECTS To understand why companies might choose a particular cost flow method, let’s ex- amine the effects of the different cost flow assumptions on the financial statements of Houston Electronics. The condensed income statements in Illustration 6-12 assume that Houston sold its 550 units for $11,500, had operating expenses of $2,000, and is subject to an income tax rate of 30%. Explain the financial effects of the inventory cost flow assumptions. S T U D Y O B J E C T I V E 3 33% LIFO 44% FIFO 19% Average Cost 4% Other Illustration 6-11 Use of cost flow methods in major U.S. companies Illustration 6-12 Comparative effects of cost flow methods HOUSTON ELECTRONICS Condensed Income Statements FIFO LIFO Average Cost Sales $11,500 $11,500 $11,500 Beginning inventory 1,000 1,000 1,000 Purchases 11,000 11,000 11,000 Cost of goods available for sale 12,000 12,000 12,000 Ending inventory 5,800 5,000 5,400 Cost of goods sold 6,200 7,000 6,600 Gross profit 5,300 4,500 4,900 Operating expenses 2,000 2,000 2,000 Income before income taxes 3 3,300 2,500 2,900 Income tax expense (30%) 990 750 870 Net income $ 2,310 $ 1,750 $ 2,030 Note the cost of goods available for sale ($12,000) is the same under each of the three inventory cost flow methods. However, the ending inventories and the costs of goods sold are different.This difference is due to the unit costs that the company allocated to cost of goods sold and to ending inventory. Each dollar of difference in ending inventory results in a corresponding dollar difference in income before income taxes. For Houston, an $800 difference exists between FIFO and LIFO cost of goods sold.
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