Question

Use the data in Exercise 5-3 to prepare comparative income statements for the month of January for Laker Company similar to those shown in Exhibit 5.8 for the four inventory methods. Assume expenses are $1,250, and that the applicable income tax rate is 40%. (Round amounts to cents.)

1. Which method yields the highest net income?

Short answer

The highest net income is yielded by the LIFO method.

Step-by-step solution

Definition of Net Income

The benefits generated by the business entity after adjusting for all the expenses incurred in the business as well as tax expenses are known as net income.

Calculation of net income under each method

Particular	Specific Identification Method	Weighted Average Method	FIFO	LIFO
Sales $\left(180\times \$15\right)$	$2,700	$2,700	$2,700	$2,700
Less: Cost of goods sold	(1,025)	(1,032)	(1,040)	(1,020)
Gross profit	$1,675	$1,668	$1,660	$1,680
Less: Expenses	(1,250)	(1,250)	(1,250)	(1,250)
Operating profit	$425	$418	$410	$430
Less: 40% income tax	(170)	(167.20)	(164)	(172)
Net income	$255	$250.80	$246	$258