Question

Jeong Company began operations on January 1, 2020, and uses the Average Cost method in costing its raw material inventory. Management is contemplating a change to the FIFO 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 2017 2018
FIFO $630000 $635000
LIFO 510000 600000
Net Income (computed under the FIFO method) 910000 1260000

Based on the above information, a change to the LIFO method in 2018 would result in net income for 2018 of:___________

Answer 1

Answer: $1,225,000

Step-by-step explanation:

LIFO means that when inventory is sold, only the most recent inventory is sold as opposed to FIFO where the earliest inventory is sold before the recent ones.

With FIFO, net income is usually higher because prices generally increase so LIFO will have a higher Cost of Goods sold.

Net income under LIFO = Net income under FIFO - Difference between FIFO and LIFO for the year

= 1,260,000 - (635,000 - 600,000)

= 1,260,000 - 35,000

= $1,225,000