Question

Exercise World began January with merchandise inventory of 90 crates of vitamins that cost a total of \(5,850. During the month, Exercise World purchased and soldmerchandise on account as follows:

Jan. 2 Purchase 130 crates @ \) 76 each

5 Sale 140 crates @ \( 100 each

16 Purchase 170 crates @ \) 86 each

27 Sale 180 crates @ $ 104 each

Requirements

4. If the business wanted to pay the least amount of income taxes possible, whichmethod would it choose?

Short answer

Answer

The LIFO method would yield a lesser tax expense.

Step-by-step solution

Gross profit under all three methods (FIFO, LIFO, Weighted average)

Gross profit computed in the previous parts under FIFO, LIFO, and Weighted Average cost amounts to as follows –

FIFO: $8,390

LIFO: $6,920

Weighted Average - $7,880

Least tax payable

As seen in the above step, the LIFO method fetches the least gross income. Thus, assuming the operating expenses are the same under all three methods, fewer tax expenses would be under the LIFO method.

This is also reasonable as LIFO computes the COGS at the recent prices, so the cost of goods sold would be higher than computed in any other method. The higher COGS would lead to generating lower taxable income.