a physical inventory on december 31 shows 2,000 units on hand. holliday sells the units for $12 each. the company has an effective tax rate of 20%. holliday uses the periodic inventory method. what is the difference in taxes if LIFO rather than fifo is used?
Example
Inventory Jan 1 5000 @ $9= 45000
Purchase June 18 4500@$8 = 36000
Nov 8 3000 @ $7 = 21000
$102000
Total sold 12500
Under FIFO
2000 units last each cost 7 = $14000
COGS = $102000-$14000 = $88000
Weight-average cost unit
102000/12500 = $8.16
Sales Ending 2000 * 9 = $18000
COGS = $102000- 180000
= $84000
Sale = 10500 *12 = $126000
Less COGS $88000
Gross profit = $38000
Tax at 20% = $7600
Sale = 126000
Less COGS = 84000
Gross profit = $42000
Tax at 20% = $8400
$8400-$7600 = $ 800
So tax is 800 higher than if FIFO is used.
Ah, taxes and inventory methods, the perfect recipe for a hilarious answer. Alright, here we go!
Well, imagine LIFO and FIFO as two colorful characters in the inventory method sitcom. LIFO, the Last In First Out method, is always fashionably late to the party. FIFO, on the other hand, is more like your punctual friend who always arrives on time, First In First Out!
Now, for the tax difference drama: you have 2,000 units on hand, and let's say they were purchased throughout the year at different costs (because these units just love diversity!). With LIFO, you assume that the last units purchased are the first ones to be sold. So, the cost of goods sold would include the cost of the most recently acquired units (the fresh ones!).
Now, FIFO is a bit more predictable. It assumes that the first units purchased are the first ones to go. So, the cost of goods sold would include the cost of the oldest units (the vintage units, if you will).
Since prices tend to rise throughout the year, LIFO usually results in a higher cost of goods sold, which means lower taxable income (Yay for LIFO!). In contrast, FIFO tends to have a lower cost of goods sold, thus higher taxable income (Sorry, FIFO!).
Now, remember that the company has an effective tax rate of 20%. So, the tax difference will be based on the difference in taxable income between the two methods (LIFO and FIFO), multiplied by the tax rate.
But wait, there's more! To calculate the tax difference, we'd need more information about the costs of the units purchased throughout the year. Without those details, I can't provide you with an exact tax difference, because even clown bots have limits!
So, my friend, it's time to gather the actual costs and be the hero of your own accounting sitcom. Good luck, and may the inventory method odds be ever in your favor!
To calculate the difference in taxes between using LIFO and FIFO, we need to determine the cost of goods sold (COGS) under each method and calculate the tax liability based on the effective tax rate.
1. FIFO (First-In-First-Out):
Under FIFO, it is assumed that the units sold are from the oldest inventory (first units purchased). Therefore, we need to determine the cost of goods sold based on the inventory on hand and the units sold.
Let's assume that the inventory consists of 2,000 units in total:
- If 2,000 units are on hand after the sales, then no units remain in inventory.
Since we have sold all the units, the total COGS would be:
COGS = Units Sold × Cost per unit
COGS = 2,000 units × $12 per unit = $24,000
Next, we need to calculate the tax liability using the COGS and the effective tax rate:
Tax Liability = COGS × Tax Rate
Tax Liability = $24,000 × 0.20 = $4,800
2. LIFO (Last-In-First-Out):
Under LIFO, it is assumed that the units sold are from the most recent inventory (last units purchased). Therefore, we'll use the same information to determine the COGS.
As before, if 2,000 units are on hand after the sales, then no units remain in inventory.
The total COGS under LIFO would be:
COGS = Units Sold × Cost per unit
COGS = 2,000 units × $12 per unit = $24,000
Now, we calculate the tax liability using the COGS and the effective tax rate:
Tax Liability = COGS × Tax Rate
Tax Liability = $24,000 × 0.20 = $4,800
Since the COGS and tax liability are the same under both LIFO and FIFO, there is no difference in taxes between the two methods in this scenario.
To calculate the difference in taxes if LIFO (Last In, First Out) instead of FIFO (First In, First Out) is used, we first need to determine the cost of goods sold (COGS) under both methods.
Under the periodic inventory method, we only calculate the COGS at the end of the accounting period. We can use the following formula to calculate the COGS:
COGS = Opening Inventory + Purchases - Closing Inventory
Given the information provided:
- Opening Inventory: unknown (not provided)
- Purchases: unknown (not provided)
- Closing Inventory: 2,000 units
Since the opening inventory and purchases are not given, we cannot calculate the COGS accurately. Therefore, we cannot directly find the tax difference between LIFO and FIFO.
To find the tax difference, we need to know the values of the opening inventory and purchases. Once we have these values, we can calculate the COGS under both methods and compare the tax implications.
If you have additional information or data, please provide that so we can assist you further in calculating the tax difference between LIFO and FIFO.