Question

Presented below are income statements prepared on a LIFO and FIFO basis for Martinez Company, which started operations on January 1, 2016. The company presently uses the LIFO method of pricing its inventory and has decided to switch to the FIFO method in 2017. The FIFO income statement is computed in accordance with the requirements of GAAP. Martinez’s profit-sharing agreement with its employees indicates that the company will pay employees 10% of income before profit-sharing. Income taxes are ignored.

	LIFO	BASIS	FIFO	BASIS
	2017	2016	2017	2016
Sales	$3,010	$3,010	$3,010	$3,010
Cost of Goods Sold	$1,150	$980	$1,060	$950
Operating Expenses	$980	$980	$980	$980
Income before Profit-Sharing	$880	$1,050	$970	$1,080
Profit-Sharing Expense	$88	$105	$100	$105
Net Income	$792	$945	$870	$975

Answer the following questions.

(a) If comparative income statements are prepared, what net income should Martinez report in 2016 and 2017?

(b) Assume that Martinez has a beginning balance of retained earnings at January 1, 2017, of $ 945 using the LIFO method. The company declared and paid dividends of $ 490 in 2017. Prepare the retained earnings statement for 2017, assuming that Martinez has switched to the FIFO method.

Answer 1

a) Preparing the income statement and calculation of net income should flint report in 2016 & 2017:

FLINT COMPANY

Income Statement

For the Year Ended

Particulars	2017	2016
Sales	$3010	$3010
Cost of Goods Sales	$1060	$ 950
Operating Expenses	$980	$980
Income before profit sharing	$970	$1080
Profit sharing expenses	$100	$105
Net Income	$870	$975

b) Prepare the retained earning statement for 2017:

Retained Earning statement of 2017

Retained Earning, January 1 as	$945
Cumulative effect of change to FIFO ( 870-975)	$105
Retained Earnings, January 1 as	$1050
Add: Net Income	$870
Deduct : Dividend	$490
Retained Earnings, December 31	$1430