Exercise 22-05

Presented below are income statements prepared on a LIFO and FIFO basis for Buffalo Company, which started operations on January 1, 2019. The company presently uses the LIFO method of pricing its inventory and has decided to switch to the FIFO method in 2020. The FIFO income statement is computed in accordance with the requirements of GAAP. Buffalos profit-sharing agreement with its employees indicates that the company will pay employees 10% of income before profit-sharing. Income taxes are ignored.

Answer the following questions.

If comparative income statements are prepared, what net income should Buffalo report in 2019 and 2020? (Round answers to 0 decimal places, e.g. 125.)

	2020	2019
Net Income	$	$

Assume that Buffalo has a beginning balance of retained earnings at January 1, 2020, of $954 using the LIFO method. The company declared and paid dividends of $520 in 2020. Prepare the retained earnings statement for 2020, assuming that Buffalo has switched to the FIFO method. (Round answers to 0 decimal places, e.g. 125.)

Sales Cost of goods sold Operating expenses Income before profit-sharing Profit-sharing expense Net income LIFO Basis 2020 2019 $3,090 $3,090 1,150 1,030 1,000 1,000 940 1,060 94 106 $846 $954 FIFO Basis 2020 2019 $3,090 $3,090 1,080 930 1,000 1,000 1,010 1,160 111 106 $899 $1,054 BUFFALO COMPANY Retained Earnings Statement $