E7-1 O

(Using the LIFO reserve)

The following disclosure was included in the footnotes of Microline Company, which uses the LIFO cost flow assumption and reported net income of $38,200 for 1997. The company’s effective tax rate is 35%.

1997 1996 Inventories at current cost $23,500 $24,300 Less: Adjustment to LIFO basis (3,200) (2,800)

Inventories on LIFO basis $20,300 $21,500 REQUIRED:

a. Compute 1997 reported net income for Microline if it had chosen to change from LIFO to FIFO at the end of 1997.

b. Compute the accumulated income tax savings enjoyed by Microline due to the choice of LIFO as opposed to FIFO.

c. Compute 1997 reported net income for Microline if it had chosen to change from LIFO to FIFO in 1990.

d. Explain how the information generated in (a), (b), and

(c) above could be useful.