You are a financial analyst presently reviewing the financial statements of Danner International and Brady Enterprises, two companies of similar size within the same industry. Net income of $39,300 and $42,700 was reported for 1997 by Danner and Brady, respectively. After a thor¬ ough comparison of the accounting methods used by the two companies, you find that they are similar except for the inventory cost flow assumption—Danner uses FIFO and Brady uses LIFO. You conduct a further review of Brady’s footnotes and discover the following. Inventories declined during 1997, causing a LIFO liquidation, which accounted for $5,100 of the before-tax net income reported in 1997 1997 1996 Inventories at current cost $36,200 $42,400 Less: Adjustment to LIFO (3,500) (4,800) Inventories at LIFO $32,700 $37,600 REQUIRED:

a. Assume that Brady’s effective tax rate is 35%, and restate Brady’s 1997 reported net income as if the company had always been a FIFO user. Is Brady’s restated reported income higher or lower than Danner’s reported net income? Explain.

b. As of the end of 1997, how much accumulated income tax had Brady saved due to its choice of LIFO instead of FIFO. How much as of the end of 1996? Does LIFO save taxes in every year? Explain.

c. Would it be advisable for Brady to change its cost flow assumption from LIFO to FIFO? Discuss.