Warspite Ltd.’s (Warspite) purchases for the year ended June 30, 2017 were:

The beginning balance in inventory on July 1, 2016 was 24,000 units with a cost of $5per unit. The inventory count on June 30, 2017 found that there were 22,000 units on hand at the end of the year. Warspite uses a periodic inventory control system. During fiscal 2017, Warspite had revenues of $984,000 and expenses other than the cost of sales and taxes of $400,000. Warspite pays taxes equal to 20 percent of its income before taxes.

a. Prepare income statements for fiscal 2017 for Warspite, using FIFO and average cost. Your income statements should show the amount of taxes that the company has to pay for the income it earned in fiscal 2017. Taxes are calculated by multiplying income before taxes (revenue—all expenses except taxes) by the tax rate.
b. Which method would you recommend that Warspite use if its primary objective of financial accounting is to minimize taxes? Explain your answer.
c. What are possible explanations as to why Warspite would choose not to use the method you recommended in(b)?

  • CreatedFebruary 26, 2015
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