Question

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The following information pertains to the inventory of Parvin Company for Year 3:

Jan. 1	Beginning inventory	400	units	@	$	20
Apr. 1	Purchased	3,000	units	@	$	25
Oct. 1	Purchased	1,100	units	@	$	26

During Year 3, Parvin sold 3,825 units of inventory at $41 per unit and incurred $16,200 of operating expenses. Parvin currently uses the FIFO method but is considering a change to LIFO. All transactions are cash transactions. Assume a 30 percent income tax rate. Parvin started the period with cash of $168,500, inventory of $8,000, common stock of $152,000, and retained earnings of $24,500.

b. Detemine the amount of income tax that Parvin would pay using each cost flow method.

	FIFO	LIFO
Income tax

c. Determine the cash flow from operating activities under FIFO and LIFO. (Amounts to be deducted should be indicated with minus sign).

	FIFO	LIFO
Net Cash Flow from Operating Activities

Answer 1

Calculation of Incom Tax
Particulars	FIFO	LIFO
Sales (3,825 *$41)	$156,825	$156,825
Cost of Goods Sold	($94,050) [(400*$20)+(3,000*$25)+(425*$26)]	($96,725) [(1,100*$26)+(2,725*$25)]
Gross Margin	$62,775	$60,100
Operating Expenses	($16,200)	($16,200)
Income before Income Tax	$46,575	$43,900
Income tax @30%	$13972	$13,170
Income after Tax	$32,602	$30,730

Cashflows from Operating Activities
Particulars	FIFO	LIFO
Cash Flows from operating Activities
cash inflows from sales	$156,825	$156,825
Cash outflows from purchases	- $103,000 [(3,000*$25)+(1,100*$26)]	- $103,000 [(3,000*$25)+(1,100*$26)]
Cash Outflows from operating expenses	- $16,200	- $16,200
Income taxes	- $32,602	- $30,730
Net cash flows from operating activities	$5,023	$6,895