Needles Co. begins operations in January, 2010 as a retailer of widgets. Its pur

ID: 2371127 • Letter: N

Question

Needles Co. begins operations in January, 2010 as a retailer of widgets. Its purchases and sales during the first quarter of 2010 are as below:
January 1: Purchases 2 widgets for $100 each.
January 15: Purchases 1 widget for $200.
February 1: Purchases 1 widget for $300.
March 1: Sells 3 widgets for $400 each.

The firm faces a tax rate of 30%. Assume the firm has no expenses other than cost of goods sold and taxes.
Required:
1. What is Needles Co.’s net income, ending inventory and tax expense for the quarter if it uses the weighted average cost method to value inventory?
2. What is Needles Co.’s net income, ending inventory and tax expense for the quarter if it uses the FIFO method to value inventory?
3. What is Needles Co.’s net income, ending inventory and tax expense for the quarter if it uses the LIFO method to value inventory?

Explanation / Answer

Required:
1. What is Needles Co.’s net income, ending inventory and tax expense for the quarter if it uses the weighted average cost method to value inventory?

Total Quantity

Total cost

Cost per unit

Jan 1

200

100

Jan 15

400

133.33

Feb 1

700

175

Mar 1

175

Sales = 3*400 = 1,200. Cost of goods sold = 3*175 = 525. Gross profit = 1,200 – 525 = 675. Tax expense = 675*.30 = 202.50. Net income = 675 – 202.50 = 472.50. Ending inventory = 175.

2. What is Needles Co.’s net income, ending inventory and tax expense for the quarter if it uses the FIFO method to value inventory?

Using first in, first out, the unit in the ending inventory would be the one purchased last. So ending inventory would be 300. Cost of Goods sold would be 400 (the ones from Jan 1and Jan 15). Gross profit would be 1,200 – 400 = 800. Tax expense would be 800*.30 = 240. Net income = 800 – 240 = 560.

3. What is Needles Co.’s net income, ending inventory and tax expense for the quarter if it uses the LIFO method to value inventory?

Using last in, first out, the unit left would be one of the ones purchased first, so ending inventory would be 100. Cost of goods sold would be one of the units from Jan 1, plus Jan 15 and Feb 1, so COGS = 600. Gross profit = 1,200 – 600 = 600. Tax expense = 600*.30 = 180. Net income = 600 – 180 = 420.