[Jindani]

On December 31, 2006 Company appropriately changed to the FIFO cost method from The weighted-average cost method for financial statement and income tax purposes. The change will result in a $70,000 increase in the beginning inventory @January 1, 2006. Assuming a 40 Percent income tax rate, the cumulative effect of this accounting change reported for the year ended December 31,2006, is
A. 700,000
B. 420,000
C. 350,000
D. 280,000


My Answer is 700,000/40%=280,000

Is any one have idea abourt FIFO cost method.
Help is really appreciated

[hamzashakaa]

The answer should be (B) because you should consider the 700,000 net of tax which means (700000*(1-.4) = 420000

For more information on FIFO accounting please follow this link (Inventory Valuation For Investors: FIFO And LIFO)

[Jindani]

let me understand equation correctly

$70,000 * (1 - .4)

Amount multiply by [ 1 (represent 1 year) - Income tax %]

[hamzashakaa]

1 does not represent the year. The equation means that you should take the effect of the beginning balance of inventory after tax. And because the tax rate is 40% then the effect of after tax beginning balance would be 60% (1-40%)

[Jindani]

Got it

Thanks for explaining