Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. accounting
  3. e8-21 (lifo effect) the following example was prov

E8-21 (LIFO Effect) The following example was provided to encourage the use of the LIFO...

70.2K

Verified Solution

Question

Accounting

E8-21 (LIFO Effect) The following example was provided to encourage the use of the LIFO method. In a nutshell, LIFO subtracts inflation from inventory costs, deducts it from taxable income, and records it in a LIFO reserve account on the books. The LIFO benefit grows as inflation widens the gap between current-year and past-year (minus inflation) inventory costs. This gap is:

With LIFO Without LIFO
Revenues $3,200,000 $3,200,000
Cost of goods sold 2,800,000 2,800,000
Operating expenses 150,000 150,000
Operating income 250,000 250,000
LIFO adjustment 40,000 0
Taxable income $ 210,000 $ 250,000
Income taxes @ 36% $ 75,600 $ 90,000
Cash flow $ 174,400 $ 160,000
Extra cash $ 14,400 0
Increased cash flow 9% 0%

Explain what is meant by the LIFO reserve account. (b) How does LIFO subtract inflation from inventory costs? (c) Explain how the cash flow of $174,400 in this example was computed. Explain why this amount may not be correct. (d) Why does a company that uses LIFO have extra cash? Explain whether this situation will always exist.

Answer & Explanation Solved by verified expert
Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:
  • Unlimited Question Access with detailed Answers
  • Zin AI - 3 Million Words
  • 10 Dall-E 3 Images
  • 20 Plot Generations
  • Conversation with Dialogue Memory
  • No Ads, Ever!
  • Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
Become a Member

Other questions asked by students