Question

Tim Mattke Company began operations in 2015 and for simplicity reasons, adopted weighted-average pricing for inventory. In 2017, in accordance with other companies in its industry, Mattke changed its inventory pricing to FIFO. The pretax income data is reported below.

Year Weighted Average FIFO

2015 \(370,000 \)395,000

2016 390,000 \(430,000

2017 410,000 \)450,000

Instructions

1. What is Mattke’s net income in 2017? Assume a 35% tax rate in all years.
2. Compute the cumulative effect of the change in accounting principle from weighted-average to FIFO inventory pricing.

Show comparative income statements for Tim Mattke Company, beginning with income before income tax, as presented on the 2017 income statement.

Short answer

1. Net Income = $292,500
2. Cumulative Effect= $68,250
3. Net Effect = $256,750

Step-by-step solution

Meaning of Pretax Earnings

The calculation of a company's financial statement provides pretax income by deducting all operating expenses and non-operating expenses, excluding interest and taxes, from the revenue generated by the business. It is also known as income before tax.

Calculation of Mattke’s Net Income in 2017

Particulars	Amount ($)
Pretax Income in 2017	450,000
Income Tax (450,000X35%)	157,500
Net income	292,500

Computation of cumulative effect of change in the accounting principle

Year	Weighted Average Income	FIFO Income	Difference	Cumulative Difference
2015	$370,000	$395,000	$25,000	$25,000
2016	$390,000	$430,000	$40,000	$65,000
2017	$410,000	$450,000	$40,000	$105,000
	Income tax @35%			$36,750
	Net effects			$68,250

Preparing Comparative Income Statement for the year 2017

Particulars	2017	2016	2015
Income before Income tax	$450,000	$430,000	$395,000
Income tax @35%	$157,500	$150,500	$138,250
Net Income	$292,500	$279,500	$256,750