DownTown Corp. uses a Periodic LIFO method to account for 100% of its inventory. In its most recent annual report, DownTown’s Balance Sheet contained the following information: Dec. 31, 2017 Dec. 31, 2018 Inventory $ 25,000,000 $ 24,000,000 DownTown’s Inventory Footnote appeared as follows: "Downtown uses LIFO to account for all inventory. The amounts reported on the Balance Sheet for Dec. 31, 2017 and Dec. 31, 2018 are $ 5,000,000 and $ 6,300,000, respectively, less than the replacement cost of the inventory. Further, during 2017 there was a reduction in the certain inventories which resulted in an increase in pre-tax income of $ 500,000.” 1. (1) If DownTown corporation would have used FIFO to account for their inventory (rather than LIFO), their Pre-Tax Income for 2017 would have been $ ______________ (fill in an amount) HIGHER / LOWER (circle one) than the Pre-Tax Income that they reported under LIFO. 2. (1) If DownTown has a tax rate of 40%, what is the cumulative tax savings that DownTown has realized through December 31, 2017 as a result of using LIFO?
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
DownTown Corp. uses a Periodic LIFO method to account for 100% of its inventory. In its most recent annual report, DownTown’s Balance Sheet contained the following information:
Dec. 31, 2017 Dec. 31, 2018
Inventory $ 25,000,000 $ 24,000,000
DownTown’s Inventory Footnote appeared as follows:
"Downtown uses LIFO to account for all inventory. The amounts reported
on the Balance Sheet for Dec. 31, 2017 and Dec. 31, 2018 are $ 5,000,000 and
$ 6,300,000, respectively, less than the replacement cost of the inventory.
Further, during 2017 there was a reduction in the certain inventories which
resulted in an increase in pre-tax income of $ 500,000.”
1. (1) If DownTown corporation would have used FIFO to account for their
inventory (rather than LIFO), their Pre-Tax Income for 2017 would have been
$ ______________ (fill in an amount) HIGHER / LOWER (circle one) than
the Pre-Tax Income that they reported under LIFO.
2. (1) If DownTown has a tax rate of 40%, what is the cumulative tax savings that
DownTown has realized through December 31, 2017 as a result of using LIFO?
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