R. J. Graziano Wholesale Corp. uses the LIFO method of inventory costing. In the current year, profit at R. J. Graziano is runni

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R. J. Graziano Wholesale Corp. uses the LIFO method of inventory costing. In the current year, profit at R. J. Graziano is runni

ng unusually high. The corporate tax rate is also high this year, but it is scheduled to decline significantly next year. In an effort to lower the current year's net income and to take advantage of the changing income tax rate, the president of R. J. Graziano Wholesale instructs the plant accountant to recommend to the purchasing department a large purchase of inventory for delivery 3 days before the end of the year. The price of the inventory to be purchased has doubled during the year, and the purchase will represent a major portion of the ending inventory value.
Required:
a. What is the effect of this transaction on this year's and next year's income statement and income tax expense? Why?
b. If R. J. Graziano Wholesale had been using the FIFO method of inventory costing, would the president give the same directive?
c. Should the plant accountant order the inventory purchase to lower income? What are the ethical implications of this order?

Business

1 answer:

Nady [3.6K] · Answer 1 · 2026-04-09T23:02:22+03:00

a. What will be the impact of this transaction on this year's income statement and the following year's income tax expense? The inventory account is a permanent asset on the balance sheet, thus it won't matter if a company buys all available stock in late December; it will have no effect on the current year's income statement or tax obligations. Companies only acknowledge the cost of goods sold when products are actually sold, rather than when they are acquired. Given that LIFO (last in, first out) is utilized for inventory, this will simply amplify the ending inventory value, which will then become the beginning inventory next year. A larger purchase in the subsequent year could lead to a greater reduction in next year's income. b. If R. J. Graziano Wholesale had employed the FIFO inventory costing strategy, would the president still provide the same directive? The overall outcome would be unchanged even with FIFO, as inventory is not categorized as COGS regardless of whether FIFO, LIFO, or any other method is used. At the start of the year, inventory values must be averaged to determine beginning inventory; this could marginally increase COGS, thereby diminishing net income, but the impact is expected to be minimal. c. Should the accountant go ahead with the inventory purchase to cut down on income? What ethical concerns does this raise? It is a futile action, and he should recognize as much. The only implication here is that this might act as a revelation of his lack of insight.