Exercise 5-6A Income tax effect of shifting from FIFO to LIFO LO 5-1

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The following information pertains to the inventory of Parvin Company during Year 2:

Jan. 1	Beginning Inventory	800	units	@	$	35
Apr. 1	Purchased	2,800	units	@	$	40
Oct. 1	Purchased	1,000	units	@	$	43

During Year 2, Parvin sold 4,200 units of inventory at $95 per unit and incurred $45,500 of operating expenses. Parvin currently uses the FIFO method but is considering a change to LIFO. All transactions are cash transactions. Assume a 40 percent income tax rate. Parvin started the period with cash of $83,000, inventory of $28,000, common stock of $58,000, and retained earnings of $53,000.

Exercise 5-6A Part a

Required a. Record the above transactions in general journal form and post to T-accounts using (1) FIFO and (2) LIFO. Use a separate set of journal entries and T-accounts for each method. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

b. Prepare income statements using FIFO and LIFO. PARVIN COMPANY Income Statements For the Year Ended December 31, Year 2 FIFO Cost of goods sold: Cost of goods sold 0 0 0 $ 0 LIFO Cost of goods sold: Cost of goods sold: 0 Cost of goods sold 0 0 $ 0 Kelerences Exercise 5-6A Part c c. Determine the amount of income tax that Parvin would pay using each cost flow method. Income tax paid using FIFO Income tax paid using LIFO d. Determine the cash flow from operating activities under FIFO and LIFO. (Amounts to be deducted should be ind sign.) Parvin Company Cash Flows from Operating Activities FIFO LIFO Cash flows from operating activities: Cash inflow from customers Cash outflow for inventory Cash outflow for operating expenses Cash outflow for income tax expense Net cash flow from operating activities $ 0 $ 0