Accounting Question Find After-tax Income Using Fifo?

I have attempted this problem multiple times but cannot come up with an correct answer. I tried using the formula (Sales-COGS-Operating Exp.=Income before taxes-Income after taxes=Net Income) I get a negative number.
Please walk me through…I appreciate it.
Hogan Industries had the following inventory transactions occur during 2012:
Units Cost/unit
Feb. 1, 2012 Purchase 18 $45
Mar. 14, 2012 Purchase 31 $47
May 1, 2012 Purchase 22 $49
The company sold 51 units at $63 each and has a tax rate of 30%. Assuming that a periodic inventory system is used and operating expenses of $300, what is the company’s after-tax income using FIFO? (rounded to whole dollars)
A.$384
B.$472
C.$330
D.$548

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One Response to “Accounting Question Find After-tax Income Using Fifo?”

  1. A Turd Sandwich says:

    51 units sold at $63 each = $3,213
    First in First Out (FIFO) system means that you assume you sold all 18 of the ones you purchased for $45, all 31 of the ones you purchased for $47 and then 2 of the ones you purchased at $49.
    So, COGS = (18 X $45) + (31 X $47) + (2 X $49)
    = $810 + $1,457 + $98
    =$2,365
    Sales – COGS – Operating Exp. = Before Tax Income.
    $3,213 – $2,365 – $300 = $548.
    $548 is your before tax income. Your tax rate is 30%. $548 X 0.70 = $383.6
    Rounded to whole dollars, that’s $384. The answer is A.
    It’s a simple Accounting 101 problem. The formula you apply here is simply Sales – COGS – Operating Expense = Before-Tax Income. Then you get After-Tax Income by multiplying Before-Tax Income by (1 – Tax Rate). FIFO versus LIFO affects the value you will get for your Cost of Goods Sold (COGS). FIFO is first in, first out, which is why you started with the products you purchased in February and worked your way forward. If you had used LIFO, you would have started with the products that you purchased in May and worked backwards. Because your purchase price was higher in March than February and highest in May, you would have ended up with a higher Cost of Goods Sold value if you had used LIFO. This would, in turn, have made you end up with a lower value for Before-Tax Income. This, in turn, would mean that you would pay less in taxes since the lower the value of the Before-Tax Income you report, the lower 30% of that number is going to be. Yet, you still sold 51 units at $63 each so your income is, in reality, the same regardless of whether you use FIFO or LIFO. Using FIFO or LIFO just changes how it is recorded, and companies try to decide which one to use based on which will allow them to report a lower before-tax income since, as we just saw, allows them to pay less in taxes. In reality, it doesn’t matter if the products you sold were the ones you bought for $49 or the ones you bought for $47. You’re selling them all for the same price. Once they’re in your inventory, the differences in price you paid for them is irrelevant. FIFO and LIFO are both just accounting assumptions. That’s why using one or the other can allow a company to get a tax benefit. In reality, their cash inflow from sales is the exact same either way. But by assuming the highest possible cost of goods sold, they can report a lower pre-tax income which in turn means that they will pay less taxes.

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