Betty Company began operations in 2014 and uses the average cost method in costing its inventory. In 2015, Betty is investigating a change to the LIFO method. Before making that determination, Betty desires to determine what effect such a change will have on net income. Betty has compiled the following information:

Assume a 40% tax rate.
If Betty adopted LIFO in 2015, net income would be
A) $ 80,000
B) $116,000
C) $170,000
D) $224,000

Question

Betty Company began operations in 2014 and uses the average cost method in costing its inventory. In 2015, Betty is investigating a change to the LIFO method. Before making that determination, Betty desires to determine what effect such a change will have on net income. Betty has compiled the following information:

Assume a 40% tax rate.
If Betty adopted LIFO in 2015, net income would be

Assume a 40% tax rate. 
If Betty adopted LIFO in 2015, net income would be
A) $ 80,000 
B) $116,000 
C) $170,000 
D) $224,000

Quizplus · Accepted Answer

To determine the effect of changing to LIFO on net income, we need to calculate the ending inventory and cost of goods sold (COGS) under the LIFO method.
Ending inventory under LIFO = $512,000
COGS under LIFO = $688,000

Now, we can calculate the gross profit and net income under LIFO as follows:
Gross profit = Sales - COGS = $1,200,000 - $688,000 = $512,000
Net income = Gross profit - Taxes = $512,000 - ($512,000 x 0.4) = $116,000

Therefore, if Betty adopts LIFO in 2015, the net income would be $116,000.

Betty Company Began Operations in 2014 and Uses the Average