Question

ATW Corporation currently uses the FIFO method of accounting for its inventory for book and tax purposes. Its beginning inventory for the current year was $8,000,000. Its ending inventory for the current year was $7,000,000. If ATW had been using the LIFO method of accounting for its inventory, its beginning inventory would have been $7,000,000 and its ending inventory would have been $5,500,000. Problem 5-30 Part a a. How much more in taxes did ATW Corporation pay for the current year because it used the FIFO method of accounting for inventory rather than the LIFO method? Excess tax paid

Answer 1

for part a

Please find below table useful to compute desired results: -

А BC FIFO LIFO 2 Beginning Inventory 8000000 7000000 3 Ending Inventory 7000000 5500000 4 Tax rate(assumed) =21/100 5 6 Decrease in Inventory(increase in COGS) (=B2-B3 =C2-C3 7 COGS Benefit =B6*B4 =C6*B4 8 Excess tax paid =C7-B7

End results would be as follows: -

A B FIFO LIFO 8,000,000 7,000,000 7,000,000 5,500,000 21% 2 Beginning Inventory 3 Ending Inventory 4 Tax rate assumed) 5 6 Decrease in Inventory(increase in COGS) 7 COGS Benefit 8 Excess tax paid 1,000,000 210,000 1,500,000 315,000 105,000

Part b

ATW uses the FIFO method of accounting to increase financial reporting income even if doing so causes it to pay more taxes on a present value basis because it will have a good impact on the outside parties.