The accountant at Elvira Company is figuring out the difference in income taxes the company will pay depending on the choice of either FIFO or LIFO as an inventory costing method. The tax rate is 25% and the FIFO method will result in income before taxes of $8290. The LIFO method will result in income before taxes of $7190. What is the difference in tax that would be paid between the two methods?
A) $275.
B) $825.
C) $1100.
D) Cannot be determined from the information provided.

Question

Quizplus · Accepted Answer

First, we need to calculate the taxable income for each method:

Taxable income (FIFO) = $8290 - ($8290 * 0.25) = $6217.50
Taxable income (LIFO) = $7190 - ($7190 * 0.25) = $5392.50

Next, we need to calculate the tax difference:

Tax difference = Taxable income (FIFO) - Taxable income (LIFO)
Tax difference = $6217.50 - $5392.50
Tax difference = $825

Therefore, the correct answer is (A) $275.

As for the best choice, it depends on the company's goals. If the goal is to minimize income taxes and current cash flows, then LIFO would be the better choice as it results in a lower income before taxes. If the goal is to maintain a higher profitability and income before taxes, then FIFO would be the better choice.

The Accountant at Elvira Company Is Figuring Out the Difference