Zehms Company began operations in 2008 and adopted weighted average pricing for

Question

Zehms Company began operations in 2008 and adopted weighted average pricing for inventory. In 2010, in accordance with other companies in its industry, Zehms changed its inventory pricing to FIFO. The pretax income data is reported below. Weighted Year Average FIFO 2008 $370,000 $395,000 2009 390,000 420,000 2010 410,000 460,000 Instructions (a) What is Zehms's net income in 2010? Assume a 35% tax rate in all years. (b) Compute the cumulative effect of the change in accounting principle from weighted-average to FIFO inventory pricing. (c) Show comparative income statements for Zehms Company/ beginning with income before income tax, as presented on the 2010 income statement.

Explanation / Answer

a) 0.65*460000 = 299000 b) cumulative effect of the change in accounting principle from weighted-average to FIFO inventory pricing = 460000/410000 = 112% increase in net income c) net income before tax = 460000 tax = 161000 net income after tax = 299000

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