Exercise 5-7B Effect of FIFO versus LIFO on income tax expense Home Gifts Inc. had cash sales of $112,500 for Year I, its first year of operation. On April 2, the company purchased 150 units of inventory at $180 per unit. On September 1 , an additional 200 units were purchased for $200 per unit. The company had 50 units on hand at the end of the year. The company's income tax rate is 40 percent. All transactions are cash transactions. Required a. The preceding paragraph describes five accounting events: (1) a sales transaction, (2) the first purchase of inventory, (3) a second purchase of inventory, (4) the recognition of cost of goods sold expense, and (5) the payment of income tax expense. Show the amounts of each event in horizontal statements models like the following ones, assuming first a FIFO and then a LIFO cost flow. b. Compute net income using FIFO. c. Compute net income using LIFO. d. Explain the difference, if any, in the amount of income tax expense incurred using the two cost flow assumptions. e. How does the use of the FIFO versus the LIFO cost flow assumptions affect the statement of cash flows? a. NC = Net Change in Cash 1. Cost of Goods Sold - FIFO: 4/2 units @ $=$ Total units @$= Income Tax Expense: b. Net income assuming FIFO cost flow: \$ (see statements model above). c. Net income assuming LIFO cost flow: \$ (see statements model above). d. produces a lower income tax by $ This occurs because: e. The difference in cash flow from operating activities is caused by: will produce a larger cash flow because there was $ less paid