1. Sprockets Plus Co. just started its business this year. Management purchased 500 units during the period at different prices as follows:

Month	Units	Unit Cost	Total
January	100	$12	$1,200
April	100	$14	$1,400
June	100	$15	$1,500
October	100	$17	$1,700
November	100	$20	$2,000
Total	500		$7.800

The firm sold 200 units at $30 each in the following months:

Month	Units	Unit Sales Price	Total
February	25	$30	$750
May	100	$30	$3,000
August	50	$30	$1,500
December	25	$30	$750
Total	200	$30	$6,000

Required (assume the firm faces a marginal tax rate of 21%).

Part A. Calculate taxable income and taxes payable assuming the firm uses FIFO (first-in, first-out) for inventory costing purposes. Write in dollar value for taxable income: ___________________ Write in dollar value for taxes payable: ___________________

Part B.Calculate taxable income and taxes payable assuming the firm uses LIFO (last-in, first- out) for inventory costing purposes. Assume that LIFO is applied with the periodic method at the end of the year (i.e. that the most recent inventory purchases are assessed as of year-end rather than at the time of the sale of some of the inventory). Write in dollar value for taxable income: ___________________ Write in dollar value for taxes payable: ___________________

Part C.Ignoring your answers to Parts A. and B., assume that taxable income is $3,500 using the LIFO method and $2,500 using the FIFO method. From a pure tax minimization perspective, which inventory method (LIFO or FIFO) would a taxpayer prefer?

1. LIFO
2. FIFO
3. The taxpayer is indifferent between the two methods for tax purposes.

Part D. A company has to use the same inventory method for both book (financial reporting) and tax purposes.

A. TRUE

B.FALSE.