Question

In: Accounting

An accounting intern for a local CPA firm was reviewing the financial statements of a client in the electronics industry.

An accounting intern for a local CPA firm was reviewing the financial statements of a client in the electronics industry. The intern noticed that the client used the FIFO method of determining ending inventory and cost of goods sold. When she asked a colleague why the firm used FIFO instead of LIFO, she was told that the client used FIFO to minimize its income tax liability. This response puzzled the intern because she thought that LIFO would minimize income tax liability. 

 

Required: 

What would you tell the intern to resolve the confusion?

Solutions

Expert Solution

When inventory prices are rising and the quantity of inventory is not decreasing then the LIFO method produces a higher cost of goods sold.

 

The higher cost of goods sold will decrease the accounting income

 

So the income tax liability will be minimized by using LIFO method of inventory.

 

When inventory prices are decreasing then the FIFO method of inventory will decrease the income tax liability.

When inventory prices are rising and the quantity of inventory is not decreasing then the LIFO method produces a higher cost of goods sold.

 

Junaid answered 2 years ago
Next > < Previous

Related Solutions

An accounting intern for a local CPA firm was reviewing the financial statements of a client in the electronics industry.
An accounting intern for a local CPA firm was reviewing the financial statements of a client in the electronics industry. The intern noticed that the client used the FIFO method of determining ending inventory and cost of goods sold. When she asked a colleague why the firm used FIFO instead of LIFO, she was told that the client used FIFO to minimize its income tax liability. This response puzzled the intern because she thought that LIFO would minimize income tax...
Henry Owens, CPA works in a local accounting firm. He is the tax manager on a...
Henry Owens, CPA works in a local accounting firm. He is the tax manager on a major client in the office. The firm prepares compiled financial statements for the client on a quarterly basis. The client was impacted by the BP oil spill off the Gulf coast, and the client would like to engage Henry to help the business prepare a claim for damages from BP. The client would like to pay Henry on a contingent fee basis where Henry...
Post, CPA, accepted an engagement to audit the financial statements of General Co., a new client....
Post, CPA, accepted an engagement to audit the financial statements of General Co., a new client. General is a publicly held retailing entity that recently replaced its operating management. In the course of applying audit procedures, Post discovered that General's financial statements might be materially misstated due to the existence of fraud. A. Describe post's responsibilities in the circumstances described above. B. Describe post's responsibilities for reporting on general's financial statements and other communications if post is precluded from applying...
Deanza, CPA, accepted an engagement to audit the financial statements of Foothill Co., a new client....
Deanza, CPA, accepted an engagement to audit the financial statements of Foothill Co., a new client. Foothill is a publicly held retailing entity that recently replaced its operating management. In the course of applying audit procedures, Deanza discovered that Foothill's financial statements may be materially misstated due to the existence of fraud. Required: (a) Describe Deanza's responsibilities on the circumstances described above. b) Describe Deanza's responsibilities for reporting on Foothill's financial statements and other communications if Deanza is precluded from...
Bell, CPA, was engaged to audit the financial statements of Kent Company, a continuing audit client....
Bell, CPA, was engaged to audit the financial statements of Kent Company, a continuing audit client. Bell is about to audit Kent’s payroll transactions. Kent uses an in-house payroll department to compute payroll data and prepare and distribute payroll checks. During the planning process, Bell determined that the inherent risk of overstatement of payroll expense is high. In addition, Bell obtained an understanding of the internal control structure and assessed control risk at the maximum level for payroll-related assertions. Required:...
Financial statements are based on generally accepted accounting principles (GAAP) and are audited by CPA firms....
Financial statements are based on generally accepted accounting principles (GAAP) and are audited by CPA firms. Do investors need to worry about the validity of those statements?
You are a manager who works for Hecht LLP, a local accounting firm. Your client is...
You are a manager who works for Hecht LLP, a local accounting firm. Your client is Triox Co. Triox is a major manufacturer of pharmaceutical products. A significant part of the company's operations involves research and development. Your firm has accepted the engagement to prepare a special report regarding the operations of Triox. (more will be discussed on this in unit five). Any findings in the report will be used to dictate the interest rate for future financing. You have...
As a new employee of a local accounting firm, your first client is Orlando University Bookstore....
As a new employee of a local accounting firm, your first client is Orlando University Bookstore. Jack Stone, the manager, would like some advice on several aspects of the bookstore’s accounting information systems. Submit a 2 page report detailing the bookstore’s need for an AIS, the benefits of the system and how this data will be used to create financial reports.
You are a manager who works for Ross, Sigh LLP, a local accounting firm. Your client...
You are a manager who works for Ross, Sigh LLP, a local accounting firm. Your client is Transport Logistics (TL) transports hazardous materials from disposal facilities located in Alberta to a secure area. Upon review of the minutes of the Board of Directors, you discover that TL has set up a higher than historical average provision for contingent liabilities related to spills that occurred while transporting the hazardous materials. Required: Discuss 5 audit procedures performed during the completion of the...
Assume that a CPA has an opportunity to bid on a new audit client. The accounting...
Assume that a CPA has an opportunity to bid on a new audit client. The accounting firm is being considered because the CPA's best friend from college is the CFO of the potential client. Apply the conceptual framework for members in public practice to this situation. Explain any threats involved and whether any safeguards can be applied to reduce the threat to an acceptable level.
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT