Income tax effect of shifting from FIFO to LIFO
The following information pertains to the inventory of Starr Company:
Jan. 1 | Beginning inventory | 500 units @ $20 |
Apr. 1 | Purchased | 2,500 units @ $22 |
Oct. 1 | Purchased | 800 units @ $28 |
During 2011, Starr sold 3,400 units of inventory at $40 per unit and incurred $34,000 of operating expenses. Starr currently uses the FIFO method but is considering a change to LIFO. All transactions are cash transactions. Assume a 30 percent income tax rate. Starr Co. started the period with cash of $60,000, inventory of $10,000, common stock of $40,000, and retained earnings of $30,000.
Required
a. Record the above transactions in general journal form and post to T-accounts using (1) FIFO and (2) LIFO. Use a separate set of journal entries and T-accounts for each method.
b. Prepare income statements using FIFO and LIFO.
c. Determine the amount of income tax that Starr would pay using each cost flow method.
d. Determine the cash flow from operating activities under FIFO and LIFO.
e. Why is the cash flow from operating activities different under FIFO and LIFO?
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