Asked by Austin Husmann on Jun 27, 2024
Verified
The accountant at Elvira Company is figuring out the difference in income taxes the company will pay depending on the choice of either FIFO or LIFO as an inventory costing method. The tax rate is 25% and the FIFO method will result in income before taxes of $8290. The LIFO method will result in income before taxes of $7190. What is the difference in tax that would be paid between the two methods?
A) $275.
B) $825.
C) $1100.
D) Cannot be determined from the information provided.
FIFO
An inventory valuation method where the first items purchased or produced are the first ones sold, impacting the cost of goods sold and inventory valuation.
LIFO
Last In, First Out, an inventory valuation method where the most recently produced or acquired items are the first to be expensed.
Income Taxes
Taxes on individual or corporate income.
- Scrutinize the implications on taxation resulting from diverse inventory costing methodologies.
Verified Answer
RF
Rosemary FondzeyufJun 29, 2024
Final Answer :
A
Explanation :
First, we need to calculate the taxable income for each method:
Taxable income (FIFO) = $8290 - ($8290 * 0.25) = $6217.50
Taxable income (LIFO) = $7190 - ($7190 * 0.25) = $5392.50
Next, we need to calculate the tax difference:
Tax difference = Taxable income (FIFO) - Taxable income (LIFO)
Tax difference = $6217.50 - $5392.50
Tax difference = $825
Therefore, the correct answer is (A) $275.
As for the best choice, it depends on the company's goals. If the goal is to minimize income taxes and current cash flows, then LIFO would be the better choice as it results in a lower income before taxes. If the goal is to maintain a higher profitability and income before taxes, then FIFO would be the better choice.
Taxable income (FIFO) = $8290 - ($8290 * 0.25) = $6217.50
Taxable income (LIFO) = $7190 - ($7190 * 0.25) = $5392.50
Next, we need to calculate the tax difference:
Tax difference = Taxable income (FIFO) - Taxable income (LIFO)
Tax difference = $6217.50 - $5392.50
Tax difference = $825
Therefore, the correct answer is (A) $275.
As for the best choice, it depends on the company's goals. If the goal is to minimize income taxes and current cash flows, then LIFO would be the better choice as it results in a lower income before taxes. If the goal is to maintain a higher profitability and income before taxes, then FIFO would be the better choice.
Learning Objectives
- Scrutinize the implications on taxation resulting from diverse inventory costing methodologies.
Related questions
In a Period of Increasing Prices Which Inventory Flow Assumption ...
In a Period of Rising Purchase Costs,LIFO Usually Gives a ...
There Are Many Different Methods Available for Costing Inventory ...
The IFRS Disallow the Use of LIFO for External Financial ...
Management's Choice to Use LIFO or FIFO Can Make a ...