# FIFO vs. LIFO

ABC Tie Company reports income for the year 2001 as \$450,000. The notes to its financial statements state that the firm uses the last in, first out (LIFO) convention to value its inventories, and that had it used first in, first out (FIFO) instead, inventories would have been \$62,000 greater for the year 2000 and \$78,000 greater for the year 2001. If earnings were restated using FIFO to determine the cost of goods sold (COGS), what would the net income be for the year 2001? Assume a tax rate of 36%. Net income would have been: A) \$460,240. B) \$455,760. C) \$439,760.

i get A lifo reserve = inv(f) - inv(l) lifo reserve 2001 = 78000 lifo reserve 2000 = 62000 cogs lifo = cogs fifo + change in lifo reserve cogs fifo 2001 = cogs lifo - change in lifo reserve so cogs fifo 2001 is 16000 lower, meaning net income should be 16000*(1-tax) higher 16000(0.64) +450000 = 460240 is that right?

Yup that is right…for some reason I could wrap my head around why COGS would be lower…I had to going the opposeite direction. Best, TheChad

I originally chose C I forgot the question asked what Net Income would be, not what COGS would be (and stupidly taking 450,000 to be the COGS LIFO figure oops!).

chedges Wrote: ------------------------------------------------------- > I originally chose C I forgot the question asked > what Net Income would be, not what COGS would be > (and stupidly taking 450,000 to be the COGS LIFO > figure oops!). I think that was my problem as well…I feel relatively comfortable with FRA but questions such as these seem to trip me up…Hopefully I will get past that come June. Best, TheChad