Hi,

I am struggling to get to the concept of calculating the net income for a specific scenario, any help will be appreciated.

We do LIFO valuation for all our inventories.


# of unit Unit Price Cost
12/31/2007 200 $2/each $400
1/10/2008 100 $2/each $200
2/12/2008 200 $3/each $600
12/15/2008 300 $5/each $1500
12/20/2008 Sold 700

LIFO allowance at the end of fiscal year is $100. How much more would the net income have been if FIFO was used? Assuming 40% tax bracket.

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Here is what I am thinking, where am I screwing up?. my FIFO inventory value will be the LIFO inventory value + $100. Which is $200 + $100 = $300. However, because of the $100 LIFO allowance I can say that my gross profit would have been an additional $100. Hence my net income would be $60 more.

Please help.

Thanks in advance.
Nad

I feel your right

Quote:

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Originally Posted by bonomo1

I feel your right

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Thanks bonomo for your response. However, I know my answer is not correct. Reason, the possible answers are one of the following.

1) $200
2) $120
3) $80
4) $400
5) $500
6) -$200

Here is the confusion I have. If I calculate the LIFO reserve based on the 700 units sold I get $300. Whereas the problem says the LIFO allowance is $100.

Where is the disconnect?