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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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BuyFindarrow_forward

Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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The Effect of Reductions in Inventory Quantities

Hill Motor Company, one of the country’s largest automobile manufacturers, disclosed the following information about its inventory in the notes to its financial statements:

Inventories are stated generally at cost, which is not in excess of market value. The cost of inventory is determined by the last-in, first-out (LIFO) method. If the first-in, first-out (FIFO) method of inventory valuation had been used, inventory would have been about $2,519 million higher at December 31, 2019, and $2,668 million higher at December 31, 2018. As a result Of decreases in inventory, certain inventory quantities carried at lower LIFO costs prevailing in prior years, as compared with costs of current purchases, were liquidated in 2019 and 2018. These inventory adjustments improved pretax operating results by approximately $134 million in 2019 and $294 million in 2018.

Required:

CONCEPTUAL CONNECTION If Hill Motor Company had used the FIFO inventory costing method, would the reduction in ending inventory quantities have increased net income?

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.

To choose:

If Hill Motor Company had used the FIFO inventory costing method, would the reduction in ending inventory quantities have increased net income?

Explanation

The LIFO method results in less total compensation since COGS is more prominent. FIFO gives us a decent indication of ending inven...

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