Income tax effect of shifting from FIFO to LIFOThe following information pertains to the inventory of the Eaton Company.Jan. 1Beginning Inventory600 units @ $22Apr. 1Purchased2,500 units @ $25Oct. 1Purchased700 units @ $28During the year, Eaton sold 3,300 units of inventory at $40 per unit and incurred $15,000 of operating expenses. Eaton currently uses the FIFO method but is considering a change to LIFO. All transactions are cash transactions. Assume a 30 percent income tax rate.Requireda. Prepare income statements using FIFO and LIFO.b. Determine the amount of income taxes Eaton would save if it changed cost flow methods.c. Determine the cash flow from operating activities under FIFO and LIFO.d. Explain why cash flow from operating activities is lower under FIFO when that cost flow method produced the higher gross margin.
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