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The Anshul Corporation used an inventory method for its tax return that was diff

ID: 2398320 • Letter: T

Question

The Anshul Corporation used an inventory method for its tax return that was different from the one it used when it prepared the income statement it distributed to its owners. Some of the differences between its tax return and the income statement it distributed to owners are shown below.

Tax Return

Owners' Income Statement

Sales

$700,000

$700,000

Cost of goods sold

$330,000

$300,000

Operating expenses

$370,000

$400,000

Income taxes expense

$129,500

$140,000

Net income

$240,500

$260,000

Determine how much more or less cash the company has available by using a different inventory method for tax purposes than it used when it prepared the income statement distributed to its owners.

$19,500 less

$19,500 more

$10,500 less

$10,500 more

Tax Return

Owners' Income Statement

Sales

$700,000

$700,000

Cost of goods sold

$330,000

$300,000

Operating expenses

$370,000

$400,000

Income taxes expense

$129,500

$140,000

Net income

$240,500

$260,000

Explanation / Answer

In the given case Anshul Corporation has used different inventory method which had saved the taxes only, as adopting different method for inventory valuation does not increase or decreasing in the cash expenditure. However adopting different method will lead us to different income and tax will be paid accordingly.

Hence in this case Anshul Corporation by adopting different method of inventory valuation has saved only in taxes which as a result increased the cash by $ 10500.

Since the problem wants a comparison in respect of valuation used for tax purposes, the answer is option d i.e. $ 10500 more.