The Brick Company had cash sales of $280,000 for Year 1, its first year of operation. On April 2, the company purchased 210 units of inventory at $390 per unit. On September 1, an additional 160 units were purchased for $425 per unit. The company had 110 units on hand at the end of the year. The company’s income tax rate is 40 percent. All transactions are cash transactions.

Required
a. The preceding paragraph describes five accounting events: 

(1) a sales transaction, 

(2) the first purchase of inventory, 

(3) a second purchase of inventory, 

(4) the recognition of cost of goods sold expense, 

(5) the payment of income tax expense. Show the amounts of each event in horizontal statements models like the following ones, assuming first a FIFO and then a LIFO cost flow.

b. Compute net income using FIFO.
c. Compute net income using LIFO.
d. Explain the difference, if any, in the amount of income tax expense incurred using the two cost flow assumptions.
e. Which method, FIFO or LIFO, produced the larger amount of assets on the balance sheet?

Transcribed Image Text:

Effect of Events on Financial Statements Panel 1: FIFO Cost Flow Statement of Cash Flows Balance Sheet Income Statement Event No. Ret. Earn. Cash Exp. Net Inc. Rev. Inventory Panel 2: LIFO Cost Flow Statement of Cash Flows Balance Sheet Income Statement Event No. Cash Ret. Earn. Exp. Net Inc. Inventory Rev.