Question

Use the data and results from Exercise 5-5 to prepare comparative income statements for the month of January for the 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.)

Required 1. Which method yields the highest net income?

Short answer

The LIFO method yields the highest net income of$348.

Step-by-step solution

Definition of Gross Profit

Gross profit is the benefits generated from sales revenue after making adjustments for the direct expenses incurred.

Calculation of Net income

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)	(923.68)	($1,040)	($810)
Gross profit	$1,675	$1,776.32	$1,660	1,890
Less: Expenses	(1,250)	(1,250)	(1,250)	(1,250)
Operating profit	$425	$526.32	$410	$640
Less: 40% income tax	(170)	(210.53)	(164)	(256)
Net income	$255	$315.79	$246	$384