dontknow1987

Hank Scorpio Wrote:
-------------------------------------------------------
> " This question confused me about accrual
> accounting. Shouldn't we recognise the sales? "
>
> No, because you haven't delivered the product yet,
> so it's not a sale, it is deferred revenue (a
> liability). This is the same as magazine
> subscriptions - take the money upfront, create a
> liability, and extinguish the liability as you
> send the magazines.
>
> " However, LIFO will generate higher cash flows
> since cash outflows for taxes will be lower for
> LIFO. "
>
> If there is inflation, using LIFO will increase
> your COGS. These expenses are tax deductible, so
> your revenue will be lower. Lower revenue = lower
> tax liability.
>
> I'll leave the rest for someone who can formulate
> a better response.
>
> Cheers


all explanations are spot on.

dontknow1987

Sorry, missed out something. Below is my whole working.

LIFO COGS = $15000
FIFO COGS = $15000 - (2500 - 500) = $14500

LIFO CS = $6500
FIFO CS = $6500 + $2500 = $9000

Pre-tax income will be higher by $500 + $2500 = $3000. Therefore, increased in RE = $3000 * 0.6 = $1800.

Why is COGS left out in the calculation?

Thanks.