Income tax effect of shifting from FIFO to LIFOThe following information pertains to the i...

Income tax effect of shifting from FIFO to LIFO

The following information pertains to the inventory of the La Bonne Company:

During the year. La Bonne sold 3,400 units of inventory at $40 per unit and incurred $17,000 of operating expenses. La Bonne currently uses the FIFO method but is considering a change to LIFO. All transactions are cash transactions. Assume a 30 percent income tax rate. La Bonne started the period with cash of $42,000, inventory of $10,000, common stock of $20,000 and retained earnings of $32,000.

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 La Bonne would save if it changed cost flow methods.

d.      Determine the cash flow from operating activities under FIFO and LIFO.

e. Explain why cash flow from operating activities is lower under FIFO when that cost flow method produced the higher gross margin.