Question

R.J Graziano wholesale corp. uses the LIFO method

BYP6-7 R. J. Graziano Wholesale Corp. uses the LIFO method of inventory costing. In the current year, profit at R.J. Graziano is running unusually high. The corporate tax rate is also high this year, but it is scheduled to decline significantly next year. In an effort to lower the current year's net income and to take advantage of the changing income tax rate, the president of R. J. Graziano Wholesale instructs the plant accountant to recommend to the purchasing department a large purchase of inventory for delivery 3 days before the end of the year. The price of the inventory to be purchased has doubled dur- ing the year, and the purchase will represent a major portion of the ending inventory value. Instructions (a) What is the effect of this transaction on this year's and next year's income statement and income tax expense? Why? (b) If R. J. Graziano Wholesale had been using the FIFO method of inventory costing, would the president give the same directive? (c) Should the plant accountant order the inventory purchase to lower income? What are the ethical implications of this order?

Answer 1

Answer:

a. President directions will not help the company to save tax or lessen net income .There will not be major effect on current income .But next year net income will go down noticeably and tax burden also reduced. Because COGS = beginning inventory + purchase - ending inventory and the last time purchase is major part of inventory.

b.If company using the FIFO method .President didn't give such direction. Because there is no effect on company profit in current year as per COGS formula.

c. For lower income accountant should not give order. Because it has no major effect on net income. As per ethical standard , it is not fair to purchase the inventory for saving tax .This is manipulation or try to take undue advantage of accounting rules and procedures.