Institution Affiliation - Speech or Presentation Example

Week Six Assignment Affiliation Problem Determining and Evaluating the Effects on the Balance Sheet, the Income ment and the Cash Flow Statement of Four Different Cost Flow Assumptions for Inventory 1. Assuming the use of a periodic inventory system, prepare a summarized income statement through gross profit for the month of January under each method of inventory: 1. Average cost. Transactions Units Total Amount Total sales Inventory, January 1, 2011 500 @ $6.00 $3,000 Purchase, January 12 600 @ $7.

00 $4,200 Purchase, January 26 200 @ $7.10 $1,420 Total 1,300 units $8,620 Sale (400 units sold for $20 each) $8,000 Sale (300 units sold for $20 each) $6,000 Total 700 units $14,000 Goods available for sales is 1,300 units with a total cost of $8,620 Weighted average cost= 8,620/1300= $6.63 Total cost of goods sold= $6.63*700= $4,641 Ending inventory =$6.63*(1300-700) = $3,978 Shelton and Blair Summarized income statement For the period ended January 2011 Net sales $14,000 Less cost of goods sold $4,641 Gross profit $9,359 2. FIFO. Cost of goods sold 400 units @6.

00= $2,400 100 units @$6.00= $600 200 units @$7.00= $1400 Total cost of goods sold = $4,400 Shelton and Blair Summarized income statement For the period ended January 2011 Net sales $14,000 Less cost of goods sold $4,400 Gross profit $9,600 3. LIFO. Cost of goods sold 200 units @7.10= $1,420 500 units @$7.00= $3,500 Total cost of goods sold = $4,920 Shelton and Blair Summarized income statement For the period ended January 2011 Net sales $14,000 Less cost of goods sold $4,920 Gross profit $9,080 4.

Specific identification. Cost of goods sold 400 units @$6.00 (from beginning inventory) = $2,400 300 units @$7.00 (from January 12 = $2,100 Total cost of goods sold = $4,500 Shelton and Blair Summarized income statement For the period ended January 2011 Net sales $14,000 Less cost of goods sold $4,500 Gross profit $9,500 2. Of FIFO and LIFO, which method would result in the higher pretax income? Which would result in the higher EPS? FIFO would result in higher pre-tax income because it has higher gross profit.

EPS is net income divided by average outstanding shares of common stock and hence higher pre-tax income results in higher net income given taxes is fixed percentage of income. This implies that FIFO would also result in higher EPS. 3. Of FIFO and LIFO, which method would result in the lower income tax expense? Explain, assuming a 35 percent average tax rate. LIFO method would result in lower income tax expense because it has lower pretax income. Comparison Assuming that other expenses are $2000 FIFO: $9600 - $2000 = $7600 à 35% of $7600 = $2660 LIFO: $9080 - $2000 = $7080 à 35% of $7080 = $2478 4.

Of FIFO and LIFO, which method would produce the more favorable cash flow? Explain. FIFO method would produce the more favourable cash flow because it has higher total ending balance. Problem 2: Reading Publically Available Financial Statements 5. I expect Lowe to write its inventory to replacement cost because market value is generally equal to the current replacement cost of the inventory. While net realizable value is generally the selling price less any additional costs incurred in selling or completing the inventory.

This implies the replacement cost is the correct value. 6. Lowe used first-in, first-out (FIFO) method of inventory accounting to determine the cost of inventory for fiscal year 2012 (Lowe, 2012, 36). 7. The corrected value for income before income taxes for that year will be $10 million + $2906 million= $2916 million. 8. Inventory turnover ratio= cost of goods sold/ average inventory 2012:32858/8355=3.93 times 2011:31663/8321=3.81 times The inventory turnover ratio improved implying that the liquidity of Lowe increased as its ability to turn inventory into cash increased.

Problem 3: Financial Statement and Income Tax Effects of Differing Depreciation Methods 9. Compute the cost of each machine. Cost of equipment= assets cost + installation costs + renovation costs Account Machine A Machine B Machine C Amount paid for asset $21,000 $30,750 $8,000 Installation cost $500 $1,000 $200 Renovation costs prior to use $2,000 $1,000 $1,500 Total cost of the machines $23,500 $32,750 $9,700 10. Depreciation expense Machine A: (23,500-1000)/5= $4,500 Depreciation Expense $4,500 Accumulated Depreciation $4,500 Machine B: Depreciation per hour= (32750-2000)/60,000= $0.

5125 Annual depreciation= $0.5125*4800= $2,460 Depreciation Expense $2,460 Accumulated Depreciation $2,460 Machine C: Depreciation rate= ¼= 25% Double declining balance rate= 25%*2= 50% Annual depreciation= 50%*$9700= $4,850 Depreciation Expense $4,850 Accumulated Depreciation $4,850 General journal Depreciation expense $11,810 Accumulated depreciation A $4,500 Accumulated depreciation B $2,460 Accumulated depreciation C $4,850 Problem 4: Using Publically Available Financial Statements 11.

The company uses the straight-line method of depreciation and the company uses same method for all depreciable assets (p.38). 12. Total accumulated depreciation and amortization is$1.579 million (p.35) 13. The estimated useful life of Lowe’s furniture and fixtures is 7 years as calculated by IRS. 14. The original cost of leasehold improvements owned by Lowe’s is $86 million (Lowes, 2012, 46). 15. The amount of depreciation and amortization was reported as expense for 2012 is $384 million (Lowes, 2012, 46). 16. 2012=2.

29, 2011=2.21 and 2010=2.10, the trend is increasing implying that the efficiency of the company in using its fixed asset to generate revenue is increasing. References Lowe’s 2011 10-K file:///C:/Users/Administrator/Downloads/Documents/Lowes_Form10K.pdf