14E
Question
Tim Mattke Company began operations in 2015 and for simplicity reasons, adopted weighted-average pricing for inventory. In 2017, in accordance with other companies in its industry, Mattke changed its inventory pricing to FIFO. The pretax income data is reported below.
Year Weighted Average FIFO
2015 \(370,000 \)395,000
2016 390,000 \(430,000
2017 410,000 \)450,000
Instructions
- What is Mattke’s net income in 2017? Assume a 35% tax rate in all years.
- Compute the cumulative effect of the change in accounting principle from weighted-average to FIFO inventory pricing.
Show comparative income statements for Tim Mattke Company, beginning with income before income tax, as presented on the 2017 income statement.
Step-by-Step Solution
Verified- Net Income = $292,500
- Cumulative Effect= $68,250
- Net Effect = $256,750
The calculation of a company's financial statement provides pretax income by deducting all operating expenses and non-operating expenses, excluding interest and taxes, from the revenue generated by the business. It is also known as income before tax.
Particulars | Amount ($) |
Pretax Income in 2017 | 450,000 |
Income Tax (450,000X35%) | 157,500 |
Net income | 292,500 |
Year | Weighted Average Income | FIFO Income | Difference | Cumulative Difference |
2015 | $370,000 | $395,000 | $25,000 | $25,000 |
2016 | $390,000 | $430,000 | $40,000 | $65,000 |
2017 | $410,000 | $450,000 | $40,000 | $105,000 |
| Income tax @35% |
|
| $36,750 |
| Net effects |
|
| $68,250 |
Particulars | 2017 | 2016 | 2015 |
Income before Income tax | $450,000 | $430,000 | $395,000 |
Income tax @35% | $157,500 | $150,500 | $138,250 |
Net Income | $292,500 | $279,500 | $256,750 |