The Reuschel Company began 2016 with inventory of 10,000 units at a cost of $7 per unit. During 2016, 50,000 units were purchased for $8.50 each. Sales for the year totaled 54,000 units leaving 6,000 units on hand at the end of 2016. Reuschel uses a periodic inventory system and the LIFO inventory cost method. Required: 1. Calculate cost of goods sold for 2016. 2. From a financial reporting perspective, what problem is created by the use of LIFO in this situation? Describe the disclosure required to report the effects of this problem.

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Inventory Valuation

Before discussing the topic inventory valuation let’s discuss the meaning of inventory. In accounting, inventory is also known as stock. Inventory means all the finished goods, materials, merchandise that a business holds for the purpose of selling it in the market with the motive of earning profit.