Question

PROBLEM 3:25 POINTS Tyler Company reported the following summarized annual data at the end of 2020: Sales revenue $1,000,000 Cost of goods sold 500.000 Gross margin 400,000 Operating expenses 280.000 Income before income taxes $ 120.000 Based on an ending FIFO Inventory of $240,000 The income tax rate is 30%. The controller of the company is considering a switch from FIFO 10 LIFO. He has determined that on a UFO basis, the ending inventory would have been $150.000 Instructions (a) Restate the summary information on a LIFO basis b) What affect any would the proposed change have on Tyler's income tax expense, net income, and cash flows? c) you were an owner of this business, what would your reaction be to this proposed change?

Answer 1

Restated summary information on LIFO basis Sales Revenue $ 10,00,000 COGS( See Note below*) $ 6,60,000 Gross Margin $ 3,40,000 Operating Expense $ 2,80,000 Income before income tax $ 60,000 * COGS = Opening Stock + Purchase - Closing stock. Due to reduction in valuation of closing stock by $ 60,000, COGS is increased by the same amount Particulars FIFO (Given)LIFO(Proposed) Difference Sales Revenue $ 10,00,000 $10,00,000 COGS( See Note below*) $ 6,00,000 $6,60,000 Gross Margin $ 4,00,000 $ 3,40,000 Operating Expense $ 2,80,000 $ 2,80,000 Income before income tax $ 1,20,000 $ 60,000 Tax Expense $ 36,000 $ 18,000 $ 18,000 Income after tax i.e. Net Income $ 84,000 $ 42,000 $ 42,000 The company's cashflow will also reduce as the proposed changes has increased COGS while sale revenue has remained constant Tax Expense is reduced by 50% due to proposed changes Net income is reduced by 50% due to proposed changes In light of results of proposed change from FIFO to LIFO, Net income and cash flows have both reduced , Accordingly proposed system should not be implemented