Question

The management of Mastronardo Corp. is considering the effects of inventory-costing methods on its financial statements and its income tax expense.

Assuming that the price the company pays for inventory is increasing, which method will:

(a)		Provide the highest net income?		FIFOLIFOAverage-cost
(b)		Provide the highest ending inventory?		FIFOLIFOAverage-cost
(c)		Result in the lowest income tax expense?		FIFOLIFOAverage-cost
(d)		Result in the most stable earnings over a number of years?		FIFOLIFOAverage-cost

Answer 1

Answer
(a)	Provide the highest net income?	FIFO
$//img.homeworklib.com/questions/c27e8060-7970-11ea-8428-c710a50d3f66.gif?x-oss-process=image/resize,w_560$ (b)	Provide the highest ending inventory?	FIFO
(c)	Result in the lowest income tax expense?	LIFO
(d)	Result in the most stable earnings over a number of years?	Average-cost

Reason
			Reason
(a)	Provide the highest net income?	FIFO	As lower cost of inventory will be charged to Cost of goods sold
(b)	Provide the highest ending inventory?	FIFO	As higher cost of inventory will be in stock at the end
$//img.homeworklib.com/questions/c27e8060-7970-11ea-8428-c710a50d3f66.gif?x-oss-process=image/resize,w_560$ (c)	Result in the lowest income tax expense?	LIFO	As Cost of goods charged will be higer so income will be lower hence income tax will be low
(d)	Result in the most stable earnings over a number of years?	Average-cost	as it average the effect of prices so gives most stable earning over a number of years