The following information pertains to the inventory of the Windjammer Company: J

Question

The following information pertains to the inventory of the Windjammer Company:

Jan. 1 Beginning inventory 400 units @ $17 Apr. 1 Purchased 2,400 units @ $22 Oct. 1 Purchased 1,200 units @ $23 During the year, Windjammer sold 3,400 units of inventory at $42 per unit and incurred $15,800 of operating expenses. Windjammer currently uses the FIFO method but is considering a change to LIFO. All transactions are cash transactions. Assume a 30 percent income tax rate. Windjammer started the period with cash of $150,200, inventory of $6,800, common stock of $132,000, and retained earnings of $25,000. Determine the amount of income taxes Windjammer would save if it changed cost flow methods. (Round intermediate calculations and final answer to whole nearest dollar amount. )

Explain how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements. Check my work 11. value: 10.00 points Required information c. Determine the cash flow from operating activities under FIFO and LIFO. (Round intermediate calculations and final answers to the nearest whole dollar amount. Amounts to be deducted should be indicated with minus sign.)

Explanation / Answer

Inventory Details Qty   Rate Value $ Opening Inventory                  400.00              17.00             6,800.00 Purchase Apr 1               2,400.00              22.00           52,800.00 Purchase Oct 1               1,200.00              23.00           27,600.00 Total Goods avaialable for sale               4,000.00           87,200.00 By FIFO method Sales                    400.00              17.00             6,800.00               2,400.00              22.00           52,800.00                  600.00              23.00           13,800.00               3,400.00           73,400.00 Closing Stock                  600.00              23.00           13,800.00 By LIFO method Sales                 2,200.00              22.00           48,400.00               1,200.00              23.00           27,600.00               3,400.00           76,000.00 Closing Stock                  400.00              17.00             6,800.00                  200.00              22.00             4,400.00 Total Closing Stock                  600.00           11,200.00 a Windjammer Income Statement Inventory Method FIFO LIFO Sales revenue          142,800.00 142,800.00 Cost Of Goods sold            73,400.00      76,000.00 Gross Profit            69,400.00      66,800.00 Operating Expenses            15,800.00      15,800.00 EBIT            53,600.00      51,000.00 Income Tax @30%            16,080.00      15,300.00 Net Income            37,520.00      35,700.00 Amount of Income tax saved by LIFO= $              780.00 b When the purchase cost is increasing , the cost of closing stock will be   highest and COGS lowest by FIFO method as it will consume low value earlier purchases. EBT and Tax expense will be highest in FIFO. Exactly opposite will happen. COGS will be more, Closing stock value will   be less, EBT and tax liability will be least in LIFO method. Weighted average method gives a result in between FIFO and LIFO   extremes and is more balanced. c Windjammer Cash Flow statement Inventory Method FIFO LIFO Cash Flow from Operating Activities Net Income            37,520.00      35,700.00 Change in Inventory            (7,000.00)      (4,400.00) Net Cash flow from operating Activities            30,520.00      31,300.00 Opening Cash Balance            150,200.00 150,200.00 Closing Cash Balance          180,720.00 181,500.00

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