Effects of Inventory Costing Methods on Cash Flows... Infinite Products, Inc., s

Question

Effects of Inventory Costing Methods on Cash Flows...

Infinite Products, Inc., sold 120,000 cases of glue at $40 per case during 2010. Its beginning inventory consisted of 20,000 cases at a cost of $24 per case. During 2010, it purchased 60,000 cases at $28 per case and later 50,000 cases at $30 per case. Operating expenses were $1,100,000, and the applicable income tax rate was 30 percent.

Using the periodic inventory system, compute net income using the FIFO method and the LIFO method for costing inventory. Which alternative produces the larger cash flow? The company is considering a purchase of 10,000 cases at $30 per case just before the year end. What effect on net income and on cash flow will this proposed purchase have under each method? ( Hint: What are the income tax consequences?)

Explanation / Answer

Sales = 120,000 * $40 = $4,800,000 Operating expenses $1,100,000 Profits is $3,700,000 Cost of Goods Sold = Under LIFO = 50,000 * $28 + 60,000 * $30 + $10,000 * $24 = $1,400,000 + $1,800,000 + $240,000 = $3,680,000 Under FIFO = 20,000 * $24 + $60,000 * $30 + 40,000 * $28 = $480,000 + $1,680,000 + $$1,200,000 = $3,400,000 Net Income Before Taxes LIFO = $20,000 FIFO = $300,000 Purchasing 10,000 @ $30 effects LIFO = $30-$24 = $6 * 10000 = $60000 ($60,000 * 30% tax = $18,000 les taxes) FIFO = There is no change

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