Question

Gable Inc. is a provider of home furnishings. The company uses the FIFO inventory method. The following information was taken from the company’s recent financial statements (dollar amounts are in thousands):Cost of Goods sold $1,850,000Income before taxes 125,000Income taxes expense (and payments) 52,500Net Income 72,500Net Cash provided by operating activities 123,250The financial statements are revealed that had Gable been using LIFO, it’s cost of good sold would have been $1,865,000. The company’s income taxed in payments amount to approximately 40% of income before taxes.a. Explain how LIFO can result in a higher cost of goods sold. Would you expect LIFO to result in a greater or lesser valuation of the companies ending inventory? Defend your answer.b. Assuming that Lollar had been using LIFO, compute the following amounts for the current year. Show your supporting computations, with dollar amounts in thousands.1. Income before taxes2. Income taxes expense3. Net income4. Net cash provided by operating activities

Answer 1

Answer:

a. LIFO is the last  method of accounting for inventory by recording the most recently produced or purchases item as the item sold first . If there is an increase in the cost of the item , this would mean higher cost of goods as you would have to record the item with the higher cost as the sold item

b.  1. Income before taxes = 110,000

    2. Income tax expense = 44,000

    3. Net income  = 66,000

    4. Net cash provided by operating activities =   116,750

Explanation:

Cost of goods sold with FIFO = $1,850,000

Cost of goods sold with LIFO = $1,865,000

Extra cost using LIFO= 1,865,000 - 1,850,000 - 15,000

Income before taxes using LIFO = 125,000(FIFO amount)- 15,000 = 110,000

Income tax expense = 40% X 110,000 = 44,000

Net income  = 110,000 - 44,000 = 66,000

Net cash provided by operating activities = 123,250(fifo amount ) - 15000(extra cost of goods) + 8,500 (tax savings) = 116,750