Question

Which of the following income statement line items are affect by the inventory method chosen? (check all that apply)

1) gross profit
2) income tax expense
3) sales
4) income before income tax expense
5) net income
6) income from operations

Answer 1

The inventory method affects the income statement line items such as gross profit, income before income tax expense, net income, and income from operations, as they are all associated with the cost of goods sold, which is influenced by how inventory is accounted. Thus, the option 1, 4, 5 and 6 are the correct options.

Step-by-step explanation:

The inventory method chosen by a company affects certain line items on the income statement. The line items affected include:

• Gross profit: Changes in inventory method affect the cost of goods sold, which in turn affects gross profit.
• Income before income tax expense: As the gross profit is affected, it cascades down to alter income before tax.
• Net income: Modifications in pre-tax income result in changes to net income because tax expenses are calculated based on the pre-tax income.
• Income from operations: Since this is a subtotal that appears above the line for income tax expense, it's directly affected by the inventory method via changes in gross profit.

Income tax expense and sales are not directly affected by the inventory method because they are based on taxable income and total revenue, respectively, independent of inventory calculations.