Q32PGA_3 - Horngren'S Financial And Managerial Accounting

Question

Futuristic Electronic Center began October with 65 units of merchandise inventory that cost \(82 each. During October, the store made the following purchases:

Oct. 3                 25 units @ \) 90 each

12                       30 units @ \( 90 each

18                       35 units @ \) 96 each

 

Futuristic uses the periodic inventory system, and the physical count at October 31 indicates that 80 units of merchandise inventory are on hand.

 

Requirements

3. Which method will result in the lowest income taxes for Futuristic? Why? Which method will result in the highest net income for Futuristic? Why?

Step-by-Step Solution

Answer

LIFO would result in the lowest tax expense. FIFO would result in the highest net income.

Step-by-Step Solution Step 1: Method yielding the lowest income tax

Under LIFO the net income would be lowest as the COGS is valued at the current prices. In the given case the gross income under LIFO is lowest at $21,040.

So the income tax would also be the lowest under LIFO.

Step 2: Method yielding the highest net income

Under FIFO the COGS is valued at the historical cost. So the value of COGS under this method would be the lowest yielding the highest income. 

In the given case the gross margin under FIFO is highest at $21,770.