A company uses LIFO and had a 2006 LIFO reserve of $90, 000 and a 2005 LIFO reserve of $85, 000. The company’s marginal tax rate is 28% and cost of goods sold is $100,000 for 2006. The change in 2006 net income if FIFO inventory costing had been used is: A. - $3,600 B. - $1,200 C. $1,200 D. $3,600 I got this question right, but used a bit of process of elimination, as well as some common sense. Would love to know if there’s an easier way - thanks!
(1-tax rate)*Change in LIFO rezerve = .72*5,000=3,600, D
Year over year change to lifo reserve is 5,000. To get the 2006 COGS, you need to subtract $5000 from the existing COGS. Pretax income will now be $5000 higher. Need to tax adjust to show impact of benefit from lower costs. (1-t)*5000 = 3600. Therefore, 3,600 increase to NI.
You guys are sick. …and yeah, the answer’s D!