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MAC Corp. had net income of $500,000 for 2016. The company's annual report contained the following...

MAC Corp. had net income of $500,000 for 2016. The company's annual report contained the following statement: "Inventory is valued using LIFO. If the FIFO method of inventory accounting had been used to value all inventories, they would have been $100,000 higher than reported ($75,000 higher at the previous year-end)." Assuming a tax rate of 40%, how much would net income have been if FIFO had been used?

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Answer #1

If FIFO method is used:

Compute the net income of the company, using the equation as shown below:

Net income = Net income (LIFO) + {(Closing inventory – Opening inventory)*(1 – Tax rate)}

                   = $500,000 + {($100,000 – $75,000)*(1 – 0.40)}

                   = $500,000 + ($25,000*60%)

                   = $515,000

Hence, the net income of the company is $515,000.

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