Case 1. Ballston Company uses the fifo method of costing its merchandise invento

Question

Case 1. Ballston Company uses the fifo method of costing its merchandise inventory. The manager is considering a change to the lifo method. Costs have increased steadily over the past three years. What effect will the change have on the following items (1) The amount of net income on the income statement. (2) The amount of income taxes to be paid. (3) The quantity of each item of merchandise that must be kept in stock. Why?

Case 2. The Pet Center stocks many kinds of merchandise. The store has always taken a periodic inventory at the end of a fiscal year. The store has not kept a perpetual inventory because of the cost. However, the manager wants a reasonably accurate cost of merchandise inventory at the end of each month, The manager needs the amount to prepare monthly income statements and to help in making decisions about the business. What would you recommend?

Explanation / Answer

Case 1.(1) The amount of net income on the income statement. - It will increase as the amoutn of closing stock will be high as the recent costs will be higher due to inflation (2) The amount of income taxes to be paid. - It will be high as the gross income will increasse due to high ending inventory (3) The quantity of each item of merchandise that must be kept in stock - Low quantity will help in reducing profits and ultimately taxes willl reduce Case 2. He should prepare monthly inventory as it helps to take immediate steps towards course correcttion Happy to help

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