M. Potter is the manager of Masson Company. Potter receives an annual salary plus a bonus of

Question:

M. Potter is the manager of Masson Company. Potter receives an annual salary plus a bonus of 15 per-cent of net income before bonus and taxes. Masson Company uses the LIFO inventory costing method. During 2010 when prices were increasing, M. Potter switched to the FIFO inventory method.

Required:

Prepare an example that illustrates the effect on the income statement of switching from LIFO to FIFO.

In addition, show the effect of the switch on the balance sheet and the statement of cash flows.

A. Did net income increase or decrease?

B. Did ending inventory increase or decrease?

C. Did cash flows increase or decrease?

D. Could a change in inventory methods entitle M. Potter to a larger bonus than she was otherwise entitled to? Explain.

E. In this situation, was the change economically beneficial to the Masson Company? Explain.

Ending Inventory
The ending inventory is the amount of inventory that a business is required to present on its balance sheet. It can be calculated using the ending inventory formula Ending Inventory Formula =... Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...