Courtney Foster, the manager of the purchasing department for The Home Depot, has just returned from a staff meeting. The controller, Kelly Brammer, has asked Courtney to purchase a large number of wood boards at yearend as a means of lowering net income. Courtneys job, as manager of the purchasing department, is to buy wood boards at the best possible price. At the beginning of the year, she was purchasing the boards for $ per board. The price is currently $ per board. Normally she would wait until next year to see if the price drops, but she is now forced to purchase boards at $ each to meet the request of the controller. The company uses the LIFO method of inventory valuation, but she doesnt know what this means. She wonders if it is right to use the purchase of an inventory item to manipulate net income and has asked you for advice, since she knows you are taking an accounting class.
Why does this yearend inventory purchase of wood boards lower net income?
Select one:
a The ending inventory will be stated at a higher amount than if FIFO was used.
b Since the company is using LIFO, the last items purchased will be included in the cost of good sold.
c Because the company is spending cash to purchase more inventory.
d The controller made a mistake; the purchase of inventory has no bearing on the amount of net income.
e A lower cost of goods sold reduces net income.
