Carolina Company uses the LIFO method for valuing its ending inventory. The foll
ID: 2332765 • Letter: C
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?
Explanation / Answer
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.
Closing Stock under LIFO (A)
8700
Closing Stock under FIFO (B)
9100
(A)-(B)
400