Assume the Bullock Corporation had the following purchases and sales of its single product during its first three years of operation:
purchases | sales
year | unit | unit cost | unit | unit price
1 | 10,000 | $10 | 8,000 | $14
2 | 9,000 | 12 | 9,000 | 17
3 | 8,000 | 15 | 10,000 | 18
totals: 27,000 27,000
Cost of goods sold is Bullock's only expenses. 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 assumption affect net income and cash flow over the life of the business? From a cash flow perspective,which cost flow assumption is better?
Please see attached excel spreadsheet for details.
This solution illustrates how to compute after-tax net income using the first-in, first-out and last-in, first-out inventory flow assumptions.