Question

Right Now Electronic Center began October with 100 units of merchandise inventory that cost \(70 each. During October, the store made the following purchases:

Oct. 3 35 units @ \) 82 each

12 45 units @ \( 84 each

18 75 units @ \) 90 each

Right Now uses the periodic inventory system, and the physical count at October 31indicates that 130 units of merchandise inventory are on hand.

Requirements

3. Which method will result in the lowest income taxes for Right Now? Why? Whichmethod will result in the highest net income for Right Now? Why?

Short answer

LIFO would result in the lowest tax expense. FIFO would result in the highest net income.

Step-by-step solution

Method yielding the lowest income tax

Under LIFO, the net income would be the lowest as the COGS is valued at the current prices. In the given case, the gross income under LIFO is lowest at $15,060.

So the income tax would also be the lowest under LIFO.

Method yielding the highest net income

Under FIFO, the COGS is valued at the historical cost. So the value of COGS under this method would be the lowest, yielding the highest income.

In the given case, the gross margin under FIFO is highest at $16,950.