Question

MCQ

On January 1, 2018, Lysol Ltd, changed its inventory valuation method from weighted-average cost to FIFO for financial statement and income tax purposes, to make their reporting as reliable and more relevant. The change resulted in $900,000 increase in the beginning inventory at January 1 , 2020. Assume a 25% income tax rate. The cumulative effect of this accounting change reported for the year ended December 31, 2020 is

a) $900,000

b) $225,000

c) $0

d) $675,000

Answer 1

Correct Option D i.e. $675000
Increase in beginning inventory	900,000
Increase in cost of Goods Sold	900,000
Less: Decrease in tax expense	(225,000)
Net Decrease in income	675,000
Note: Beginning inventory is added in computing cost of goods sold, so due to increase in beginning inventory, cost of goods sold in increased. And tax is deducted on each expense also on cost of goods sold. So tax of 25% is deducted on cost of goods sold. Net effect is taken on income