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Homework answers / question archive / Cranchey Company reported a LIFO ending inventory of $670,000 on its balance sheet at December 31, 2016
Cranchey Company reported a LIFO ending inventory of $670,000 on its balance sheet at December 31, 2016. Cranchey's disclosure notes to the financial statements reported that the LIFO Reserve at December 31, 2015 was $32,000 and the LIFO Reserve at December 31, 2016 was $40,000. Which of the following statements is correct for Cranchey Company for the effect of the LIFO Reserve in 2016 in converting LIFO amounts to FIFO amounts?
A, Cost of goods sold would have been higher by $40,000 under FIFO.
B, Pretax income would have been higher by $32,000 under FIFO.
C, Pretax income would have been higher by $8,000 under FIFO.
D, Cost of goods sold would have been higher by $8,000 under FIFO.
Answer:
C. Pretax Income would have been higher by $8,000 under FIFO
Step-by-step explanation
LIFO Reserve refers to the excess of Inventory under FIFO over LIFO.
LIFO Reserve = Inventory under FIFO - Inventory under LIFO
LIFO Reserve as at December 31, 2015 = $32,000
LIFO Reserve as at December 31, 2016 = $40,000
Increase in LIFO Reserve in 2016
=LIFO Reserve as at December 31, 2016 - LIFO Reserve as at December 31, 2015
= $40,000 - $32,000
= $8,000
Increase in LIFO Reserve implies that the inventory under FIFO is greater than that of LIFO.
Inventory under FIFO is $8,000 is greater than that of LIFO.
This means that the cost of goods sold under FIFO is $8,000 less than that of LIFO since the cost of goods sold and ending inventory are inverse in proportion.
Since cost of goods sold is $8,000 less under FIFO, the profit is $8,000 more.
Hence, we can say that the pretax income would have been higher by $8,000 under FIFO.
