Question

The management of Hoyt Corp. is considering the effects of various inventory-costing methods on its financial statements and its income tax expense. Assuming that the price the company pays for inventory is increasing, which method will(a)Provide the highest net income(b) Provide the highest ending inventory(c) Result in the lowest income tax expense(d) Result in the most stable earnings over a number of years

Answer 1

a) FIFO will Provide the highest net income

b) FIFO will Provide the highest ending inventory

c)LIFO will Result in the lowest income tax expense

d) Average Cost will Result in the most stable earnings over a number of years

Step-by-step explanation:

A company cannot manipulate income by choosing which unit to ship because the cost of a unit sold is not determined by a serial number. Instead, the cost attached to the unit sold is always the oldest cost. Under FIFO, purchases at the end of the period have no effect on cost of goods sold or net income. Thus, FIFO method will the highest net income and the highest ending inventory.

When considering the LIFO method the result will be the lowest taxable income when there is a rise in the price. When an organization uses LIFO, the allows it to use LIFO only for tax purposes. The most stable eraning over the given number of years can be resulted by the average cost.