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AMA201_E_4_13 - Jesica Islas Intermediate Accounting 1...

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Jesica Islas Intermediate Accounting 1 February 05, 2007 Professor A. Wu Chapter 4 Exercises E 4-13 (Change in Accounting Principle) Year Weighted-Avg FIFO 2005 $370,000 $395,000 2006 390,000 430,000 2007 410,000 450,000 Instructions: (a) What is Mattke’s net income in 2007? Assume a 35% tax rate in all years. FIFO 450,000 35% (157,500) Net Income $292,500 (b) Compute the cumulative effort of the changes in accounting principle from weighted- average to FIFO inventory pricing. Year Weighted Average FIFO Difference Tax Rate (35%) Net Effect 2005 $370,000 $395,000 $25,000 2006 390,000 430,000 40,000 Total $65,000 $22,750 $42,250 (c) Show comparative Income Statements for Tim Mattke Company beginning with income before Income Taxes, as presented on the 2007 Income Statement. 2007 2006 2005 Income before taxes 450,000 430,000 395,000 Income tax 157,500 150,500 138,250 Net Income $292,500 $279,500 $256,750
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Jesica Islas Intermediate Accounting 1 February 05, 2007 Professor A. Wu Chapter 4 Changes in Accounting Principle Underlying Concepts Companies can change principles, but  they must demonstrate that the newly  adopted principle is preferable to the old  one. Such changes result in lost  consistency from period to period.
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