Fay Stocks sells oriental rugs. She uses the FIFO method of inventory costing. The inventory available for sale for a particular style of rug is as follows:

On July 31, a wealthy customer purchases three rugs paying $2,600 for each. Fay immediately replaces those rugs with three new rugs at a cost of $2,300 apiece. In addition, Fay immediately pays income tax on the sale at a rate of 40%. (Assume that she has no other expenses.) What is Fay€™s net income (after taxes) from the sale of the rugs? What is Fay€™s net cash flow from the sale of the rugs, the payment of income taxes, and the subsequent purchase of three new rugs? Why is there a substantial difference between net income and cash flow? What other circumstances can lead to differences like those illustrated in thiscase?

Inventory Date Current Inventory Cost June 14 June 21 July 5 $1,200 each $1500 each @ $1,700 each