The Big Bubba Company began operations on January 1, 2004 and used the FIFO meth
ID: 2416949 • Letter: T
Question
The Big Bubba Company began operations on January 1, 2004 and used the FIFO method to assign cost to its inventory. Management is considering a change to the LIFO method. Given the following information: a change to the LIFO method in 2005 would result in net income for 2005 of
Final inventory
2004
2005
FIFO
$24,000
$27,000
LIFO
20,000
21,000
Net income (per FIFO)
$12,000
$17,000
Based on the above information, a change to the LIFO method in 2005 would result in net income for 2005 of
Final inventory
2004
2005
FIFO
$24,000
$27,000
LIFO
20,000
21,000
Net income (per FIFO)
$12,000
$17,000
Explanation / Answer
Final inventory 2004 2005 FIFO $24,000 $27,000 LIFO 20,000 21,000 Net income (per FIFO) $12,000 $17,000 Under FIFo the inventory cost is more than under LIFO method which means the COGS is less in FIFO which increase the profit More the closing inventory less the COGS=Opening Inventory+Purchases-Closing Inventory So, in LIFO COGS increase because the Closing Inventory is less to understand the effect lets put the amount in formula Now to calculate 2005 Income under LIFO we have to take the opening & Closing inventory value of LIFO and compare it with LIFO For 2005 FIFo= 24000+Purchases-27000 Increase in Closing Stock $3,000 LIFo= 20000+Purchases-21000 Increase in Closing Stock $1,000 This means closing stock has decreased by $2000 in clsong stock, therby the COGS has been increased by $2000 Net Income for 2005=$17000-2000=$15000 Ans
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