FINANCIAL STATEMENT ANALYSIS CASE 1 (a) Sales.......................................................................... Cost of goods sold*.................................................. Gross profit............................................................... Selling and administrative expense........................ Income from operations........................................... Other expense........................................................... Income before income tax....................................... $618,876,000 474,206,000 144,670,000 102,112,000 42,558,000 24,712,000 $ 17,846,000 *Cost of goods sold (per annual report).................. LIFO effect ($5,263,000 – $3,993,000)..................... Cost of goods sold (per FIFO)................................. $475,476,000 (1,270,000) $474,206,000 (b) $17,846,000 income before taxes X 46.6% tax = $8,316,236 tax; $17,846,000 – $8,316,236 tax = $9,529,764 net income as compared to $8,848,000 net income under LIFO. This is $681,764 or about 8% different. The question as to materiality is to allow the students an opportunity to judge the significance of the difference between the two costing methods. Since it is less than 10% different, some students may feel that it is not material. An 8% change in net income, however, is probably material, but this would depend on the industry and perhaps on the company’s own past averages. (c) No, the use of different costing methods does not necessarily mean that there is a difference in the physical flow of goods. As explained in the text, the actual physical flow need have no relationship to the cost flow assumption. The management of T J International has determined that LIFO is appropriate only for a subset of its products, and these reasons have to do with economic characteristics, rather than the physical flow of the goods. LO: 3, Bloom: AN, Difficulty: Moderate, Time: 15-20, AACSB: Analytic, Communication, AICPA BB: None Reporting, Research, AICPA PC: Communication 8-72