Effect of FIFO versus LIFO on income tax expenseThe Keys Company had cash sales of $250,00...

Effect of FIFO versus LIFO on income tax expense

The Keys Company had cash sales of $250,000 for 2011, its first year of operation. On April 2, the company purchased 200 units of inventory at $350 per unit. On September l, an additional 150 units were purchased for $375 per unit. The company had 100 units on hand at the end of the year. The company’s income tax rate is 40 percent. All transactions are cash transactions.

Required

a. The preceding paragraph describes five accounting events: (l)a sales transaction, (2) the first purchase of inventory. (3) a second purchase of inventory. (4) the recognition of cost of goods sold expense, and (5) the payment of income tax expense. Record the amounts of each event in horizontal statements models like the following ones, assuming first a FIFO and then a LIFO cost flow.

b. Compute net income using FIFO.

c. Compute net income using LIFO.

d. Explain the difference, if any, in the amount of income tax expense incurred using the two cost flow assumptions.

e. Which method, FIFO or LIFO, produced the larger amount of assets on the balance sheet?