Question

1. Inventory on the Income Statement: What conclusion can you derive out from the Income Statement (see table 2) in terms of: (10 pts. each)
   1. Profit after-tax income using FIFO method vs. LIFO and WAC
   2. Federal Income Tax (@ 40%) using LIFO method vs. FIFO and WAC

Income Statement	FIFO	LIFO	WAC
Revenues	₱              75,903	₱              75,903	₱              75,903
Less: Cost of Goods Sold (COGS)	27,712	28,605	28,375
Gross Profit	₱              48,191	₱              47,298	₱              47,528
Less: Selling, General and Administrative Expenses	5,250	5,250	5,250
Depreciation and Amortization Expenses	2,750	2,750	2,750
Goodwill Expense	1,310	1,310	1,310
Profit Before Taxes	₱              38,881	₱              37,988	₱              38,218
Less: Federal Income Tax (assume 40%)	15,552	15,195	15,287
Profit After Tax Income	₱              23,329	₱              22,793	₱              22,931

Answer 1

Effect on Profit and Federal Income tax of choosing different inventory methods

Method	Impact on Profit	Impact on Federal Income tax
FIFO	Manipulation of income is not possible. Entity cannot manipulate income by choosing which item to load first because the cost of a unit sold is not determined by a serial number. Instead, the cost attached to the unit sold is always the oldest cost. Also purchases at the end of period have no effect on Cost of Goods Sold (COGS) or net income. Due to the oldest cost is recognised first, the profit is highest among all the methods.	As the profit is highest also inflation is part of the market and this will lead to booking more profit in period of inflation. It will lead to heavier tax burden and shows paper profit only.
LIFO	Opposite of FIFO, in LIFO method COGS will consist of the latest purchases made and will lead to higher cost which leads to COGS and ultimately lowest profit among all the methods	LIFO method results in lowest profits, and thus the lowest federal income taxes compared to all other methods. During high inflation periods entities shift from FIFO to LIFO to save taxes.
WAC	When an entity uses the weighted-average method and prices are rising, its COGS is less than that obtained under LIFO, but more than that obtained under FIFO. Therefore profit under WAC is more than that of LIFO but less than that of FIFO.	Due to WAC falling in between FIFO and LIFO, taxes are not as high as FIFO but are neither as low as LIFO. But are between these two.