If the company sells the inventory for $20 with cost $10, what is the Net Income change?

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Enhance your accounting skills for the PSIA Accounting Exam. Use flashcards and multiple-choice questions to prepare effectively with hints and explanations. Get set for your exam success!

Multiple Choice

If the company sells the inventory for $20 with cost $10, what is the Net Income change?

Explanation:
When inventory is sold, revenue increases by the selling price and cost of goods sold increases by the cost of that inventory, creating pretax profit equal to price minus cost. In this case, 20 minus 10 gives a pretax gain of 10. After accounting for income taxes, the net income impact is reduced by the tax on that gain. With a 40% tax rate, taxes on the 10 pretax profit are 4, leaving a net income increase of 6. Therefore, the correct result is that net income rises by 6. If there were no taxes, the increase would be 10; the given answer reflects the after-tax effect.

When inventory is sold, revenue increases by the selling price and cost of goods sold increases by the cost of that inventory, creating pretax profit equal to price minus cost. In this case, 20 minus 10 gives a pretax gain of 10. After accounting for income taxes, the net income impact is reduced by the tax on that gain. With a 40% tax rate, taxes on the 10 pretax profit are 4, leaving a net income increase of 6. Therefore, the correct result is that net income rises by 6. If there were no taxes, the increase would be 10; the given answer reflects the after-tax effect.

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