Question

In: Accounting

Inventory on the Income Statement: What conclusion can you derive out from the Income Statement (see...

  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

Solutions

Expert Solution

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.

Related Solutions

Analyze the income statement and explain what we can learn about the company from reading the income statement.
2015 2016Sales 3,432,000 5,834,400COGS 2,864,000 4,980,000Other expenses 340,000 720,000Analyze the income statement and explain what we can learn about the company from reading the income statement.Deprec. 18,900 116,960total op. costs 3,222,900 5,816,960EBIT 209,100. 17,440Int. expense 62,500 176,000pre tax earnings. 146,600. (158,560)taxes (40%) 58,640 (63,424)Net Income. 87,960 (95,136)
What can we find out by conducting the Vertical Analysis of the Income Statement? 1. We...
What can we find out by conducting the Vertical Analysis of the Income Statement? 1. We can find out whether individual expenses are growing per unit sales over time. 2. We can find out whether the amounts of individual expenses are growing over time. 3. We can find out how fast revenues are growing over time. 4. We can find out growth rate of net profit of each year against the previous year. Which of the following describes the Retained...
what conclusion can be drawn from a study with a null result
what conclusion can be drawn from a study with a null result
What are the effects on the income statement and balance sheet of each of the inventory...
What are the effects on the income statement and balance sheet of each of the inventory cost flow assumptions—FIFO, LIFO, and average-cost? What are the tax effects of each method? Suggest when a company might choose to use each method.
Explains in details: Conclusion you can get from contract of Tawarruq.
Explains in details: Conclusion you can get from contract of Tawarruq.
On a firm's income statement, you likely will see two entries for earnings per share (EPS):...
On a firm's income statement, you likely will see two entries for earnings per share (EPS): basic and diluted EPS. Basic EPS is the firm's net income available to shareholders divided by the number of shares of common stock. However, while common shares are definite claims of an owner's equity, unexercised stock options, convertible debt and preferred stock, and warrants represent potential claims on an owner's equity. If they are exercised or converted, the number of common shares may increase....
How can you test to see if your needs statement is directly linked to the issue...
How can you test to see if your needs statement is directly linked to the issue identified in the problem statement? This is for a grant writing class. Please cite your source if you used one. Thank you.
Give a brief conclusion obtained in your research project. What did you prove/find out?
Give a brief conclusion obtained in your research project. What did you prove/find out?
What is the difference in reporting income from a subsidiary in the parent’s separate income statement...
What is the difference in reporting income from a subsidiary in the parent’s separate income statement and in consolidated financial statements? (Please not the answers from Textbook Solutions)
1. What are the three limitations of the income statement? 2. Can the terms net income...
1. What are the three limitations of the income statement? 2. Can the terms net income and comprehensive income be used interchangeably? Why? Define both, net income and comprehensive income. 3. Explain the difference between a single-step and multiple-step income statement. Which statement is more transparent?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT