Answer:
The company would report in a disclosure note accompanying its financial statements:
Lifo assigns an amount to cost of goods sold on the income statement that approximates its current cost; it also better matches current costs with revenues in computing gross profit.
Explanation:
Lifo assigns the highest amount to cost of goods sold - yielding the lowest gross profit and net income which also yields a temporary tax advantage by postponing payment of some income tax.
The tax of LIFO method would be $ 42,500 than the tax of FIFO method.
January 1, 2021 Inventory , $950,000 (38,000 units at $25 each)
Purchases 116,000 units $30 per unit = $ 3480,000
Sales 120,000
LIFO Ending Inventory 34,000 units at $ 25 = $ 850,000
LIFO Cost of Goods Sold = $ 3480,000+ $950,000-$ 850,000= $ 3580,000
If FIFO was used the ending Inventory would be 34,000 units at $ 30
= $ 1020,000
And FIFO Cost of Goods Sold = $ 3480,000+ $950,000-$ 1020,000=
$ 3410,000.
There would be difference of $ 170,000 in the LIFO and FIFO Cost of goods sold. The LIFO COGS is $ 170,000 more than FIFO COGS .
That difference would also be in the income LIFO method. The income of LIFO would be $ 170,000 less therefore having ($ 170,000* 25%) $ 42,500 less income tax.
