Question 3:

Inventory (LIFO Disclosure)

Tzachi Zach was hired as CFO of Rankin, Inc. on December 31, 2004. Rankin currently uses the LIFO method

of costing its inventory. Tzachi reviews the process involved in applying the LIFO method and questions

whether it is cost efficient to continue using LIFO. In order to complete his analysis, Tzachi must calculate the

net income effects of using the LIFO method relative to the FIFO method. Rankin, Inc. adopted LIFO when it

began operations on January 1, 2001. The following information is available from Rankin's accounting records.

Ending Inventory: LIFO FIFO

December 31, 2001 $1,960,000 $2,080,000

December 31, 2002 2,500,000 2,840,000

December 31, 2003 2,850,000 3,300,000

December 31, 2004 3,020,000 3,420,000

Tzachi asks you to help him complete his analysis. He tells you to assume a tax rate of 40% and to ignore

present value effects in your calculations. He also tells you that he expects inventory costs and quantities to rise

in the foreseeable future. Below are the specific instructions he provides you.

a.

Calculate the total amount of any tax differences associated with the use of LIFO since its adoption on

January 1, 2001.Be sure to indicate whether more or less tax has been paid as a result of using LIFO.

b.

Calculate the pre-tax income statement tax effect associated with using LIFO for the year ended December 31, 2004.

Be sure to indicate whether reported income is higher or lower when LIFO is used.

c.

Assume the estimated incremental cost of using LIFO (relative to FIFO) is approximately $40,000 per year

(before-tax). The incremental costs are primarily due to increased recordkeeping costs.

Based on this information and your analysis, would you recommend that the company stops using LIFO?

Show calculations to support your answer and state any relevant assumptions you are making in your recommendation.