Question

a physical inventory on december 31 shows 2,000 units on hand. holliday sells the units for $12 each. the company has an effective tax rate of 20%. holliday uses the periodic inventory method. what is the difference in taxes if LIFO rather than fifo is used?

Answer 1

Example

Inventory Jan 1 5000 @ $9= 45000
Purchase June 18 4500@$8 = 36000
Nov 8 3000 @ $7 = 21000

$102000
Total sold 12500
Under FIFO
2000 units last each cost 7 = $14000
COGS = $102000-$14000 = $88000



Weight-average cost unit
102000/12500 = $8.16


Sales Ending 2000 * 9 = $18000
COGS = $102000- 180000
= $84000



Sale = 10500 *12 = $126000
Less COGS $88000
Gross profit = $38000
Tax at 20% = $7600
Sale = 126000
Less COGS = 84000
Gross profit = $42000
Tax at 20% = $8400
$8400-$7600 = $ 800
So tax is 800 higher than if FIFO is used.