Carolina Company Uses the LIFO Method for Valuing Its Ending

question 217

Essay

Carolina Company uses the LIFO method for valuing its ending inventory.The following financial statement information is available for its first year of operation:
$$\begin{array} {c}\text { Carolina Company } \\\text { Income Statement } \\\text { For the year ended December 31 }\\\begin{array} { | l | r | } \hline \text { Sales } & \$ 60,000 \\\hline \text { Cost of goods sold } & 23,000 \\\hline \text { Gross profit } & \$ 37,000 \\\hline \text { Expenses } & 13,000 \\\hline \text { Income before taxes } & \$ 24,000 \\\hline\end{array}\end{array}$$
Carolina'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?

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