a What was Farry s 2001 COGS Larry COGS Beg Inv Dec 31 2000 10 000 End Inv Dec 31 2001 30 000 Purchases 50 000 Larry COGS Inv 30 000 Beg LIFO reserve Dec 31 2000 0 End LIFO reserve Dec 31 2001 15 000 Bal Bal Farry s Farry COGS 30 000 2001 COGS is 15 000 b What was Farry s 2002 net income Larry COGS Beg LIFO reserve Dec 31 2001 End LIFO reserve Dec 31 2002 COGS Farry under FIFO method 15 000 40 000 15 000 10 000 45 000 COGS of Farry under FIFO method 45 000 is greater than COGS of Larry under LIFO method 40 000 by an amount of 5 000 45 000 40 000 When COGS increases it decreases the net income Earnings before interest and tax rate Amount x 1 tax rate 5 000 x 1 0 3 5 000 x 0 7 3 500 net income of Farry will be 3 500 less than the net income of Larry Net income of Farry in 2002 Net income of Larry in 2002 3 500 15 000 3 500 11 500 Farry s 2002 net income is 11 500 c What is Farry s retained earnings balance on Dec 31 2003 Farry s retained earnings under FIFO in 2003 Larry s retained earnings under LIFO in 2003 Ending LIFO reserve x 1 tax rate 45 000 40 000 x 1 0 3 45 000 40 000 x 0 7 73 000 Farry s retained earnings balance on December 31 2003 is 68 000