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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Explain the issue of inventory liquidation when a company uses the LIFO cost flow assumption. Why is this an issue exclusive to LIFO?

To determine

Elaborate the concerns related with inventory liquidation when a company uses LIFO cost flow assumption and explain the reasons behind the concern being exclusive to LIFO.

Explanation

LIFO: In Last-in-First-Out method, items purchased recently are sold first. So, the value of the ending inventory consist the initial cost for the remaining unsold items.

When a company follows LIFO cost flow assumption, it sells more number of units which is more than the purchased units during that period, the cost of the units that are purchased in the previous period are included in cost of goods sold. Assuming there is an existence of inflation, the units would have lower costs that would result in higher gross profit. This will result to an increase of liquidation profits if the inventory liquidation level reaches to the base level...

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