Gross Margin Differences—FIFO vs. LIFO
Assume the Bullock Corporation had the following purchases and sales of its single product during its first three years of operation.
|
|
Purchases |
Sales |
||
|
Year |
Units |
Unit Cost |
Units |
Unit Price |
|
1 |
10,000 |
$10 |
8,000 |
$14 |
|
2 |
9,000 |
12 |
9,000 |
17 |
|
3 |
8,000 |
15 |
10,000 |
18 |
|
|
27,000 |
|
27,000 |
|
Cost of goods sold is Bullock’s only expense. The income tax rate is 40%.
1. Determine the net income (after tax) for each of the three years assuming FIFO historical cost flow.
2. Determine the net income (after tax) for each of the three years assuming LIFO historical cost flow.
3. Compare the total net income over the life of the business. How do the different cost flow assumptions affect net income and cash flows over the life of the business? From a cash flow perspective, which cost flow assumption is better? Explain.