The following information can be found in Manufacturer Company's financial statements. $\begin{array}{llll}
&\underline{2006}&\underline{2005}\
\text { COGS } & \$ 2,500,000 & \$ 2,000,000 \
\text { Inventory } & \$ 180,000 & \$ 140,000 \
\text { Net income } & \$ 125,000 & \$ 100,000 \
\text { Retained earnings } & \$ 500,000 & \$ 400,000 \
\text { LIFO reserve } & \$ 40,000 & \$ 30,000\
\text { Tax rate }&40\%&40\%
\end{array}$

-If Manufacturer used FIFO, its retained earnings as of the end of fiscal 2006 would be:
A)$540,000.
B)$440,000.
C)$524,000.
D)$506,000.

Question

The following information can be found in Manufacturer Company's financial statements. $\begin{array}{llll}
&\underline{2006}&\underline{2005}\
\text { COGS } & \$ 2,500,000 & \$ 2,000,000 \
\text { Inventory } & \$ 180,000 & \$ 140,000 \
\text { Net income } & \$ 125,000 & \$ 100,000 \
\text { Retained earnings } & \$ 500,000 & \$ 400,000 \
\text { LIFO reserve } & \$ 40,000 & \$ 30,000\
\text { Tax rate }&40\%&40\%
\end{array}$

-If Manufacturer used FIFO, its retained earnings as of the end of fiscal 2006 would be:
A)$540,000.
B)$440,000.
C)$524,000.
D)$506,000.

Quizplus · Accepted Answer

The retained earnings can be calculated by subtracting the total dividends paid from the net income earned over the years. Since the question does not provide information about dividends, we cannot use that method. Instead, we can use the fact that under FIFO, the cost of goods sold will be higher, leading to lower net income compared to other methods. Therefore, the retained earnings for FIFO will be lower than the other methods. Looking at the answer choices, only option C is lower than the other choices and therefore the best choice.

The Following Information Can Be Found in Manufacturer Company's Financial