Question

Blago Wholesale Company began operations on January 1, 20X1, and uses the average cost method in costing its inventory. Management is contemplating a change to the FIFO method in 20X2 and is interested in determining how such a change will affect net income. Accordingly, the following information has been developed:
20X1 20X2
Final inventory:
Average cost $150,000 $255,000
FIFO 160,000 270,000
Condensed income statements for Blago Wholesale appear below:
20X1 20X2
Sales $1,000,000 $1,200,000
Cost of goods sold 600,000 720,000
Gross profit 400,000 480,000
Selling, general, and
administrative 250,000 275,000
Net income $150,000 $205,000
Required:
Based on this information, what would 20X2 net income be after the change to the FIFO method? Ignore any income tax effects of this change in accounting method.

Answer 1

Answer:

net income for 20x2 is $220,000

Explanation:

if the company changes to the FIFO method, the adjusting entry should be:

Dr Inventory 15,000

    Cr Cost of goods sold 15,000

This means that COGS will decrease by $15,000.

20x2 income statement

Sales                              $1,200,000

Cost of goods sold        ($705,000)

Gross profit                     $495,000

S&A expenses               ($275,000)

Net income                     $220,000