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An Oil distributor had 120,000 gallons of oil valued at $3.80/gallon. They bought 120,000 more gallons at $2.70/gallon, and subsequently 120,000 more gallons at $3.60 each. After that, they sold 170,000 gallons at $4.00 each. Their selling and administrative expenses are $20,000 and their tax rate is 35%, will they pay more taxes if they value their inventory using FIFO or LIFO, and what will be the difference between the two methods

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Answer:

They will pay more taxes if they value inventory using LIFO.

The difference in taxes between the two methods is $8400($ 32,550.00  minus $ 24,150.00)

Explanation:

The oil distributor will pay more taxes using LIFO method in valuing the cost of goods sold because LIFO would pick the prices of goods recently purchased which were lower overall compared to prices of goods earlier purchased.

Hence,inventory sold is charged with lower prices and eventually lower costs of good sold s well higher gross profit which translates into higher taxes.

It would be preferable to value inventory sold using FIFO so as to reduce taxes payable by $8400.

Find attached detailed computation.

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