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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Inventory Purchase Price Volatility

In 2019, Steel Technologies Inc. changed from the LIFO to the FIFO method for its inventory costing. Steel Technologies' annual report indicated that this change had been instituted because the price at which the firm purchased steel was highly volatile.

Required:

Explain how FIFO cost of goods sold and ending inventory would be different from LIFO when prices are volatile.

To determine

Introduction:

The first in, first out (FIFO) method of inventory valuation is a cost stream supposition that the first products obtained are likewise the first merchandise sold. In many organizations, this presumption intently coordinates the genuine stream of merchandise, as is viewed as the most hypothetically right inventory valuation method.

The last in, first out (LIFO) method is used to place an accounting value on inventory. The LIFO method operates under the assumption that the last item of inventory purchased is the first one sold.

To choose:

Explain how FIFO cost of goods sold and ending inventory would be different from LIFO when prices are volatile.

Explanation

Rearward in, first-out, or LIFO, utilizes the latest costs first. At the point when costs are rising, you incline toward LIFO since it gives you the most elevated expense of products sold and the least assessable income. First-in, first-out, or FIFO, applies the most punctual costs first. In rising markets, FIFO yields the least expense of products sold and the most elevated assessable income. In the event that you offer exceptional things like custom gems, you may favor the particular recognizable proof method...

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