Question

Blago Wholesale Company began operations on January 1, 2017, and uses the average cost method in costing its inventory. Management is contemplating a change to the FIFO method in 2018 and is interested in determining how such a change will affect net income. Accordingly, the following information has been developed:

2017 2018
Final inventory:
Average cost $150,000 $255,000
FIFO 160,000 270,000

Condensed income statements for Blago Wholesale appear below:

2017 2018
Sales $1,000,000 $1,200,000
Cost of goods sold 600,000 720,000
Gross profit 400,000 480,000
Selling, general, and administrative 250,000 275,000
Net income $150,000 $205,000

Required:
Based on this information, what would 2018 net income be after the change to the FIFO method?

Answer 1

Blago Wholesale Company

New Net income for 2018 = $220,000

Step-by-step explanation:

Data and Calculations:

Final inventory: 2017 2018

Average cost $150,000 $255,000

FIFO 160,000 270,000

Difference $10,000 $15,000

2017 2018

Sales $1,000,000 $1,200,000

Cost of goods sold 600,000 720,000

Gross profit 400,000 480,000

Selling, general, and

administrative 250,000 275,000

Net income $150,000 $205,000

2018 Net Income after the change to the FIFO method:

Cost of goods sold (weighted average) 720,000

less adjustment for change of method 15,000

Adjusted cost of goods sold 705,000

Income Statement after the change

Sales $1,200,000

Cost of goods sold 705,000

Gross profit 495,000

Selling, general, and

administrative 275,000

Net income $220,000