Libretto,Inc.,uses the FIFO method and had ending inventory for 2010 of $35,000.If Libretto had used the LIFO method,its ending inventory would have been $32,000.Assume equal beginning inventories for the two methods.If Libretto had used the LIFO method instead of the FIFO method in 2010,how would its income before income tax have changed?
A)Decrease of $35,000
B)Increase of $35,000
C)Decrease of $3,000
D)Increase of $3,000

Question

Quizplus · Accepted Answer

If Libretto had used the LIFO method, its ending inventory would have been $32,000, which means that the cost of goods sold would have been higher by $35,000 - $32,000 = $3,000. Since cost of goods sold is subtracted from revenue to arrive at income before income tax, using the LIFO method would have decreased the income before income tax by $3,000. Therefore, the correct answer is C, decrease of $3,000.