Question

The following inventory data are available for Hutchinson for the year 2020: Beginning Ending FIFO 317,300 380,700 LIFO 285,200 327,700 Assuming an income tax rate of 32%, if Hutchinson elects LIFO instead of FIFO, its reported net income will be approximately:

Answer 1

	Beginning Inventory	Ending Inventory
Under FIFO	317,300	380,700
Under LIFO	285,200	327,700
Change	32,100	53,000

If the entity used the LIFO method of inventory valuation, then the Cost of goods sold will be higher by $20,900 [$23,000 - $32,100]

Applicable tax rate = 32%

Therefore, the Income will be lower by to the enter of the after tax value of $20,900

= $20,900 x (1 – 0.32)

= $20,900 x 0.68

= $14,212

“Hence, its reported net income will be approximately $14,212 Lower”