Question

Exercise 4-14 Tim Mattke Company began operations in 2018 and for simplicity reasons, adopted weighted-average pricing for inventory. In 2020, in accordance with other companies in its industry, Tim Mattke changed its inventory pricing to FIFO. The pretax income data is reported below.

Year	Weighted-Average	FIFO
2018	$370,000	$395,000
2019	390,000	430,000
2020	410,000	450,000

Q1

What is Tim Mattke’s net income in 2020? Assume a 20% tax rate in all years.

Net Income

Q2

Compute the cumulative effect of the change in accounting principle from weighted-average to FIFO inventory pricing.

Net effect

Q3

Show comparative income statements for Tim Mattke Company, beginning with income before income tax, as presented on the 2020 income statement.

	2020	2019	2018
Income before income tax
Income tax
Net income

Answer 1

Q1)

Net income = Pretax income - tax

tax = 450,000 * 20% = 90,000

Net income = 450,000 - 90,000 = $360,000

Q2)

Difference between Weighted average and FIFO

2018 = 395000 - 370000 = 25,000

tax = 25000*20% = 5000

Net effect = 25,000 - 5000 = 20,000

2019 = 430,000 - 390,000 = 40,000

tax = 40,000 * 20% = 8000

Net effect = 40,000 - 8000 = 32,000

Cumulative = 20,000 + 32,000 = 52,000

Q3)