Q28PGA_4 - Horngren'S Financial And Managerial Accounting

Question

Fit Gym began January with merchandise inventory of 78 crates of vitamins that cost a total of \(4,290. During the month, Fit Gym purchased and sold merchandise on account as follows:

Jan. 5 Purchase                     156 crates @ \) 64 each

13 Sale                                    180 crates @ \( 100 each

18 Purchase                           114 crates @ \) 75 each

26 Sale                                    150 crates @ $ 116 each

 

Requirements

4. If the business wanted to pay the least amount of income taxes possible, which method would it choose?

Step-by-Step Solution

Answer

The LIFO method would fetch the least tax expenses

Step-by-Step Solution

Step 1: Gross profit under all three methods (FIFO, LIFO, Weighted average)

Gross profit commutated in the previous parts under FIFO, LIFO, and Weighted average  cost amounts to as follows –

FIFO - $13,929

LIFO - $13,566

Weighted Average - $13,845

Step 2: Least tax payable

As can be seen in the above step, the LIFO method fetches the least gross income. Thus, assuming the operating expenses are the same under all three methods, there would be less tax expenses under the LIFO method.

This is also reasonable as LIFO computes the COGS at the recent prices, so the cost of goods sold would be higher than computed in any other method. The higher COGS would lead to generating lower taxable income.