Question

Use the data and results from Exercise 5-5 to prepare comparative income statements for the month of January for the company similar to those shown in Exhibit 5.8 for the four inventory methods. Assume expenses are $1,250, and that the applicable income tax rate is 40%. (Round amounts to cents.)

2. Does net income using weighted average fall above, between, or below that using FIFO and LIFO?

Short answer

Net income determined under the weighted average methodlies between the net income under LIFO and FIFO.

Step-by-step solution

Definition of Ending Inventory

Ending inventory refers to the resources held by the business entity in the form of semi-finished goods, finished goods, and raw materials at the end of the fiscal year.

Net Income of Weighted Average Method

Net income determined under the weighted average method is lower than LIFO’s net income and higher than FIFO’s Net income.

Particular	Specific Identification Method	Weighted Average Method	FIFO	LIFO
Sales $\left(180\times \$15\right)$	$2,700	$2,700	$2,700	$2,700
Less: Cost of goods sold	($1,025)	(923.68)	($1,040)	($810)
Gross profit	$1,675	$1,776.32	$1,660	1,890
Less: Expenses	(1,250)	(1,250)	(1,250)	(1,250)
Operating profit	$425	$526.32	$410	$640
Less: 40% income tax	(170)	(210.53)	(164)	(256)
Net income	$255	$315.79	$246	$384