Question

Carolina Company uses the LIFO method for valuing its ending inventory. The following financial statement information is available for its first year of operation:

Carolina Company

Income Statement

For the year ended December 31

Sales    60,000

Cost of Goods sold   23,000

Gross Profit   37,000

Expenses 13,000

Income before taxes $ 24,000

Carolina's ending inventory using the LIFO method was $8,700. Carolina's accountant determined that had the company used FIFO, the ending inventory would have been $9,100.

a. Determine what the income before taxes would have been, had Carolina used the FIFO method of inventory valuation instead of LIFO.

b. What would be the difference in income taxes between LIFO and FIFO, assuming a 30% tax rate?

c. If Carolina wanted to lower the amount of income taxes to be paid, which method would it choose?

Answer 1

Closing Stock under LIFO (A)	8700
Closing Stock under FIFO (B)	9100
(A)-(B)	400

Since the stock values in FIFO is higher by Rs. 400. Cost of goods sold in FIFO will be less by Rs. 400 compare to LIFO.

Cost of goods sold under LIFO (A)	23000
Cost of goods sold under FIFO (23000+400)	23400

Answer A

Calculation of Income before tax under FIFO and LIFO:-

Particulars	LIFO	FIFO
Sale	60000	60000
Cost of goods sold	23000	22600
Gross profit	37000	37400
Expenses	13000	13000
Income before Tax	24000	24400
Tax @30%	7200	7320
Profit after Tax	16800	17080

Answer B

Income tax in FIFO will be higher by $120.

Answer C

LIFO method will be used since it will reduce tax by $120.