EXERCISE 8.4

Effects of Different Cost Flow Assumptions

Gable, Inc., is a provider of home furnishings. The company uses the FIFO inventory method. The following information was taken from the company’s recent financial statements (dollar amounts are in thousands):

The financial statements also revealed that had Gable been using LIFO,its cost of goods sold would have been $1,865,000. The company’s income taxes and payments amount to approximately 40 percent of income before taxes.

1. Explain how LIFO can result in a higher cost of goods sold. Would you expect LIFO to result in a greater or lesser valuation of the company’s ending inventories? Defend your answer.

2. Assuming that Lollar had been using LIFO, compute the following amounts for the current year. Show your supporting computations, with dollar amounts in thousands.

   1. Income before taxes

   2. Income taxes expense (which are assumed equal to income taxes actually paid)

   3. Net income

   4. Net cash provided by operating activities

       

      A) Problem 8.4A     Debit Cost of Goods Sold $1,560 (part a, LIFO method).  

       &

      B) Problem 8.4BDebit Cost of Goods Sold $120 (part a, LIFO method).