Carolina Company uses the perpetual LIFO method for valuing its ending inventory. The following financial statement information is available for its first year of operation:Carolina CompanyIncome StatementFor the year ended December 31Sales$60,000Cost of goods sold 23,000Gross profit$37,000Expenses 13,000Income before taxes$24,000Carolina's ending inventory using the perpetual LIFO method was $8,700. Carolina's accountant determined that had the company used perpetual 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 |
c. Carolina would choose the LIFO method because it results in lower income taxes.
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