Franco Company uses the FIFO inventory method. Its 2014, the company reported net income of €820,000. Had average-cost been used, the company would have reported net income of €760,000. Assuming a 40% tax rate, what is the impact of the inventory cost flow assumption on Franco's taxes for 2014?
A) Franco would pay €24,000 more in taxes for 2014 as a result of using FIFO inventory method rather than average-cost.
B) Franco would pay €36,000 less in taxes for 2014 as a result of using FIFO inventory method rather than average-cost.
C) The inventory method does not impact the amount of income tax paid.
D) Not determinable without income before taxes.

Question

Quizplus · Accepted Answer

FIFO method results in higher net income and thus higher taxable income, leading to a higher amount of taxes paid. In this case, the difference in net income between FIFO and average-cost is €60,000, and 40% of that is €24,000. Therefore, Franco would pay €24,000 more in taxes for 2014 if they used the FIFO method instead of average-cost.

Franco Company Uses the FIFO Inventory Method