discuss some of the disadvantages associated with the change to lifo 615127
Using LIFO and saving tax dollars
Financial statements as of December 31, 2008, for Johnson & Johnson are as follows. The company used the FIFO inventory cost flow assumption to prepare these statements (dollars in millions).
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Income Statement |
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Sales |
$63,747 |
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Cost of goods sold: |
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Beginning inventory |
$ 5,110 |
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Purchases |
18,453 |
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Goods mailable for sale |
$23,563 |
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Less: Ending inventory |
5,052 |
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Cost of goods sold |
18,511 |
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Gross profit |
$45,236 |
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Expenses |
28,307 |
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Net income before taxes |
$16,929 |
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Federal income tax (24%) |
3,980 |
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Net income |
$12,949 |
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Balance Sheet |
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Cash |
$10,368 |
Current liabilities |
$20,852 |
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Inventory |
5,052 |
Long-term liabilities |
21,549 |
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Other assets |
69,1192 |
Shareholders’ equity |
42,511 |
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Total liabilities and |
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Total assets |
$84,912 |
shareholders” equity |
$84,912 |
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Assume that on December 30, 2008, Johnson & Johnson decided to change from the FIFO to the LIFO inventory cost flow assumption. Assume that the ending inventory value under the LIFO assumption is $4,000.
REQUIRED:
a. Compute the change in Johnson & Johnson”s current ratio associated with the change from FIFO to LIFO. Round to two decimal places.
b. Compute the change in Johnson & Johnson”s gross profit and net income associated with the change from FIFO to LIFO. Assume that the dollar amount of the change is reflected in cost of goods sold.
c. How many tax dollars would be saved by the change from FIFO to LIFO?
d. Discuss some of the disadvantages associated with the change to LIFO.