Aiwa Inc. uses the average-cost inventory method. In 2014, the company reported net income of ¥59,600,000. Had average-cost been used, the company would have reported net income of ¥58,900,000. Assuming a 25% tax rate, what is the impact of the inventory cost flow assumption on Aiwa's taxes for 2014?
A) Aiwa would pay ¥175,000 less in taxes for 2014 as a result of using the average-cost inventory method rather than FIFO.
B) Aiwa would pay ¥525,000 less in taxes for 2014 as a result of using the average-cost inventory method rather than FIFO.
C) The inventory method does not impact the amount of income tax paid.
D) Not determinable without income before taxes.

Question

Quizplus · Accepted Answer

The difference in net income due to the inventory method is ¥700,000 (¥59,600,000 - ¥58,900,000). With a 25% tax rate, the tax impact is ¥175,000 (25% of ¥700,000).

Aiwa Inc Uses the Average-Cost Inventory Method