Problem 3 (25 points)

Fashion Queen Inc. is a handbag wholesaler and uses a perpetual inventory system. The companys beginning inventory of their most popular handbag and its purchases during the month of June were as follows:

Quantity Unit Cost Total Cost

Beginning inventory (June 5)...................... 50 $50................................................. $2,500

Purchase (June 16).................................... 25 $60.................................................. $1,500

Purchase (June 23).................................... 35 $68.............................................. $2,380

Total....................................................... 110 ........................................................ $6,380

On June 28, the business sold 48 handbags. The other 62 units remained in inventory as of June 30.

1. Compute the cost of goods sold relating to the sale on June 28th and the ending inventory of units on June 30, end of the fiscal year, using the following cost flow assumptions. (18 points)

(Show the number of units and the unit costs of each layer)

(1) (2)

Cost of Goods Inventory on June 30th

Sold

a Average cost $_______________ $_______________

b Firstin, firstout $_______________ $_______________

c Lastin, firstout $_______________ $_______________

2. Using the cost figures computed above, answer the following questions:

a. Which of the three cost flow assumptions will result in the company reporting the lowest net income for the current year? Explain. (3 points)

b. Which of the three cost flow assumptions will result in the highest income tax expense for the year? Explain. (4 points)