Louisiana Co. has been using the LIFO method of inventory valuation since it began operations 10 years ago. Its year-end inventory was $420K, but it would have been $460K if FIFO had been used. Based solely on the information provided, which of the following statements is the most accurate? a) If FIFO had been used, income before taxes would have been $40K more over the 10-year period. b) If FIFO had been used, income before taxes would have been $40K less over the 10-year period. c) If FIFO had been used, income before taxes would have been $40K more in the current year. d) If FIFO had been used, income before taxes would have been $40K less in the current year.
C?
I also thought it was c), but the answer is a). Can someone please explain?
I’ll go with A since we do not know the change in LIFO reserve for the current year.
yea…you cant calculate the change for current year because you do know know the change in LIFO reserve for the current year… you only know it for the 10 year period. COGSF=COGSL- DELTA LIFO
It makes sense that the impact is over ten years rather than the current year. Prices may have increased by 40k in the first year but ever since remained flat. In that scenario, the net income would have been higher under FIFO in the first year, and the net income under the two methods could be the same in the subsequent years.
So based on this information, we just assume beginning of the 10 years, Lifo reserve was 0, so the change throughout the 10 years is 40?
Never mind, I get it.