Question

Heinz Company began operations on January 1, 2012, and uses the FIFO method in costing its raw material inventory. Management is contemplating a change to the LIFO method and is interested in determining what effect such a change will have on net income. Accordingly, the following information has been developed:

Final Inventory 2012 2013
FIFO $640,000 $ 712,000
LIFO 560,000 636,000
Net Income (computed under the FIFO method) 980,000 1,030,000
Based on the above information, a change to the LIFO method in 2013 would result in net income for 2013 of
a. $1,070,000.
b. $1,030,000.
c. $ 954,000.
d. $ 950,000.

Answer 1

The correct choice is c. $954,000.

Step-by-step explanation:

To determine the effect of the change from FIFO to LIFO on the net income for the year 2013, we need to adjust the net income that was computed under the FIFO method by the change in inventory cost that results from using LIFO instead.

The net income under FIFO for 2013 is $1,030,000. The ending inventory under FIFO is $712,000, and under LIFO is $636,000. The difference in ending inventory between FIFO and LIFO for 2013 is $712,000 - $636,000 = $76,000.

Under LIFO, the ending inventory would be lower by $76,000, which would increase the cost of goods sold (COGS) by the same amount. An increase in COGS would reduce the net income. Therefore, the adjusted net income for 2013 under LIFO would be:

$1,030,000 - $76,000 = $954,000.