Carolina Company uses the LIFO method for valuing its ending inventory. The following financial statement information is available for its first year of operation: Carolina CompanyIncome Statement For the year ended December 31Sales$60,000Cost of goods sold23,000Gross profit$37,000Expenses13,000Income before taxes$24,000Carolina's ending inventory using the LIFO method was $8,700. Carolina's accountant determined that had the company used FIFO, the ending inventory would have been $9,100.a. Determine what the income before taxes would have been, had Carolina used the FIFO method of inventory valuation instead of LIFO.b. What would be the difference in income taxes between LIFO and FIFO, assuming a 30% tax rate?c. If Carolina wanted to lower the amount of income taxes to be paid, which
method would it choose?
What will be an ideal response?
a. If ending inventory is $400 higher using FIFO ($9,100 - $8,700), then the cost of goods sold would be $400 lower, gross profit $400 higher, and income before taxes would be $400 higher. Therefore, income before taxes would be $24,000 + $400 = $24,400.
b.
| ? | LIFO | FIFO |
| Income before taxes | $24,000 | $24,400 |
| Income taxes (30%) | $7,200 | $7,320 |
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