Nixon Wholesale Corp. uses the LIFO cost flow method. In the current year, profi

Question

Nixon Wholesale Corp. uses the LIFO cost flow method. In the current year, profit at Nixon is running unusually high. The corporate tax rate is also high this year, but it is scheduled to decline significantly next year. In an effort to lower the current year's net income and to take advantage of the changing income tax rate, the president of Nixon Wholesale instructs the plant accountant to recommend to the purchasing department a large purchase of inventory for delivery 3 days before the end of the year. The price of the inventory to be purchased has doubled during the year, and the purchase will represent a major portion of the ending inventory value. (a) What is the effect of this transaction on this year's and next year's income statement and income tax expense? Why? (b) (b) If Nixon Wholesale had been using the FIFO method of inventory costing, would the president give the same directive? (c) (c) Should the plant accountant order the inventory purchase to lower income? What are the ethical implications of this order?

Explanation / Answer

       2. If R. Nixon Wholesale had been using the FIFO method of inventory costing, would the president give the same directive?

Ans: The president would not have given the same directive if he was using the FIFO     method because the counting of the inventory is different under the First In, First Out method than LIFO method (Last in Last Out Method) . The LIFO method allows for the inventory that was just bought to be sold first, If company were using FIFO method than it would have increased the Profit in Current year and have resulted in high Tax Burden in current year as Tax rate is high in current year and due to which company could not have taken the advantage of lower tax rate in next year.

Ans : As this is not the case of Tax evasion by manipulating the figures of Financials. We can say such practices fall under the purview of TAX Avoidance, and this Tax Avoidance is also a ill practice which cause Revenue Loss to Government and thus considered as non compliance.

Therefore Plant accountant should express his written concern to president about future consequence company can face if President opts out such practice and for this purpose he is required to do necessary due diligence.

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