Question

Income tax effect of shifting from FIFO to LIFO

The following information pertains to the inventory of Parvin Company during Year 2:

Jan. 1	Beginning Inventory	500	units	@	$	34
Apr. 1	Purchased	2,200	units	@	$	39
Oct. 1	Purchased	700	units	@	$	42

During Year 2, Parvin sold 3,100 units of inventory at $85 per unit and incurred $42,500 of operating expenses. Parvin currently uses the FIFO method but is considering a change to LIFO. All transactions are cash transactions. Assume a 40 percent income tax rate. Parvin started the period with cash of $77,000, inventory of $17,000, common stock of $52,000, and retained earnings of $42,000.

b. Prepare income statements using FIFO and LIFO.
c. Determine the amount of income tax that Parvin would pay using each cost flow method.
d. Determine the cash flow from operating activities under FIFO and LIFO. (Amounts to be deducted should be indicated with minus sign.)

Answer 1