During 2018, WW Inc. reduced its LIFO eligible inventory quantities due to a problem with its major supplier. The effect of this liquidation was to increase its cost of goods sold by approximately $50 million. WW has a 40% income tax rate. If WW had not experienced these supplier problems and the resulting liquidation:
A) Its 2018 net income would have been $30 million lower because inventory purchase prices were rising.
B) Its 2018 net income would have been $30 million lower because inventory purchase prices were declining.
C) Its 2018 net income would have been $30 million higher because inventory purchase prices were rising.
D) Its 2018 net income would have been $30 million higher because inventory purchase prices were declining.

Question

Quizplus · Accepted Answer

The effect of WW's LIFO liquidation was a reduction in pre-tax income by $50 million and a reduction in net income by $30 million. This would have been avoided if the supplier problems had been avoided. The inventory prices were declining because the effect of using older inventory prices was to increase cost of goods sold.