The Wall Street Journal reported, Cheating on inventories is a common way for small businesses to chisel
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The news story concluded, When its time to borrow, business owners generally want profits and assets to look fat. The garment maker uses a different fiscal period for financial statements to his bank: After writing down the inventory as of Dec. 31, he writes it up six months later when the fiscal year ends. In this way, he underpays the IRS and impresses his banker.
Some describe that kind of inventory accounting as WIFLWhatever I Feel Like.
1. At a 40% income tax rate, what amount of federal income taxes would the owner evade according to the news story?
2. Consider the next year. By how much would the ending inventory have to be understated to evade the same amount of income taxes?
Use the following table and fill in the blanks:
* This is the income tax effect of only the cost of goods sold. To shorten and simplify the analysis, sales and operating expenses are assumed to be the same eachyear.
Financial StatementsFinancial statements are the standardized formats to present the financial information related to a business or an organization for its users. Financial statements contain the historical information as well as current period’s financial...
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Related Book For
Introduction to Financial Accounting
ISBN: 978-0133251036
11th edition
Authors: Charles Horngren, Gary Sundem, John Elliott, Donna Philbrick
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