Q32PGA_3 Futuristic Electronic Center beg... [FREE SOLUTION]

Chapter 6: Q32PGA_3 (page 369)

Futuristic Electronic Center began October with 65 units of merchandise inventory that cost $82 each. During October, the store made the following purchases:
Oct. 3 25 units @ $ 90 each
12 30 units @ $ 90 each
18 35 units @ $ 96 each
Futuristic uses the periodic inventory system, and the physical count at October 31 indicates that 80 units of merchandise inventory are on hand.
Requirements
3. Which method will result in the lowest income taxes for Futuristic? Why? Which method will result in the highest net income for Futuristic? Why?

Short Answer

Expert verified

LIFO would result in the lowest tax expense. FIFO would result in the highest net income.

Step by step solution

Step-by-Step SolutionStep 1: Method yielding the lowest income tax

Under LIFO the net income would be lowest as the COGS is valued at the current prices. In the given case the gross income under LIFO is lowest at $21,040.

So the income tax would also be the lowest under LIFO.

Method yielding the highest net income

Under FIFO the COGS is valued at the historical cost. So the value of COGS under this method would be the lowest yielding the highest income.

In the given case the gross margin under FIFO is highest at $21,770.

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	2019	2018	2017
Net Sales Revenue	\( 212,000	\) 161,000	\( 170,000
Cost of Goods Sold:
Beginning Merchandise Inventory	\)22,000	\(28,000	\)41,000
Net cost of purchase	131,000	100,000	86,000
Cost of goods available for sale	153,000	128,000	127,000
Less: Ending Merchandise Inventory	34,000	22,000	28,000
Cost of goods sold	119,000	106,000	99,000
Gross Profit	93,000	55,000	71,000
Operating Expenses	63,000	28,000	39,000
Net Income	\( 30,000	\) 27,000	$ 32,000

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Short Answer

Step by step solution

Step-by-Step SolutionStep 1: Method yielding the lowest income tax

Method yielding the highest net income

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