Comparing inventory methods Assume that a firm separately determined inventory under FIFO and LIFO and then compared the results. A. In each space that follows, place the correct sign [less than (&lt;), greater than (&gt;), or equal (=)] for each comparison, assuming periods of rising prices. B. Why would management prefer to use LIFO over FIFO in periods of rising prices?

Corporate Financial Accounting

14th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781305653535

Chapter
Section

Corporate Financial Accounting

14th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781305653535
Chapter 6, Problem 6.14EX
Textbook Problem
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Comparing inventory methodsAssume that a firm separately determined inventory under FIFO and LIFO and then compared the results.A. In each space that follows, place the correct sign [less than (<), greater than (>), or equal (=)] for each comparison, assuming periods of rising prices.B. Why would management prefer to use LIFO over FIFO in periods of rising prices?

(a)

To determine

Comparing inventory methods:

The cost flow is different for different methods of valuation of inventory like LIFO, FIFO and weighted average inventory method. Therefore, the three methods result in different ending inventory value, cost of merchandise sold, net income and gross profit.

To place: correct signs for each of the following comparisons assuming in the period of rising prices.

Explanation of Solution

During the period of rising prices, the LIFO method matches the cost against sales on the income statement of the company. As the costs are higher in period of rising prices, the cost nearly matches with the revenues of the company. Therefore the net income under LIFO will be lesser.

This would lead to lower gross profit and this would offer lower income taxes to the company...

(b)

To determine

To discuss: the reason that LIFO method that would be preferred than FIFO method by the company in the period of rising prices.

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