For a number of years. the corporation has used the last-in. first-out (LIFO) method of accounting for
Question:
For a number of years. the corporation has used the last-in. first-out (LIFO) method of accounting for its steel inventories. In periods of extended inflation. coupled with uncertain supplies of raw materials from foreign sources, and rapid increases and fluctuations in prices of raw materials such as nickel and chrome nickel scrap. earnings can be affected unrealistically for any given year.
Because of these factors. the corporation will apply to the Internal Revenue Service for permission to discontinue using the LIFO method of accounting for valuing those inventories for which this method has been used If such application is granted. the LIFO reserve at December 31. 2011. of $12,300,000 would be eliminated. which would require a provision for income taxes of approximately $6,150,000. The corporation will also seek permission to pay the increased taxes over a 10-year period. If the corporation had not used the LIFO method of accounting during 2010. net earnings for the year would have been increased by approximately $1,500,000. The 2011 annual report also disclosed the following:
a. The corporation indicates that earnings can be affected unrealistically by rapid increases and fluctuations in prices when using LIFO. Comment.
b. How much taxes will need to be paid on past earnings from the switch from LIFO? How will the switch from LIFO influence taxes in the future?
c. How will a switch from LIFO affect 2011 profits?
d. How will a switch from LIFO affect future profits?
e. How will a switch from LIFO affect 2011 cash flow?
f. How will a switch from LIFO affect future cash flow?
g. Speculate on the real reason that the corporation wishes to switch from LIFO.
South Western Federal Taxation 2015 Essentials of Taxation Individuals and Business Entities
ISBN: 9781285438290
18th edition
Authors: James Smith, William Raabe, David Maloney, James Young