Reference no: EM132553886

Electrical Wholesale Goods Ltd uses the LIFO method of inventory costing. In 2020, profit at Electrical Wholesale Goods is running unusually high.

The company tax rate is also high in 2020, but it is expected to decline significantly in 2021.

In an effort to lower the current year's profit (2020) and to take advantage of the changing income tax rate, the chief executive officer of Electrical Wholesale Goods instructs the accountant to recommend to the purchasing department a large purchase of inventory for delivery 3 days before the end of the year (2020).

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

Question a) What is the effect of this transaction in 2020 and 2021 income statement and Balance sheet? Explain

Question b) If Electrical Wholesale Goods had been using the FIFO method of inventory costing, would the chief executive officer give the same directive? Explain

Question c) Should the accountant order the inventory purchase to lower profit? Explain