Textbook Problem

In January, Broome Inc. requested and secured permission from the Commissioner of Internal Revenue to compute inventories under the last-in, first-out (LIFO) method and elected to determine inventory cost under the dollar-value method. Broome Inc. satisfied the Commissioner that cost could be accurately determined by use of an index number computed from a representative sample selected from the company’s single inventory pool.

Required:

1. 1. Why should a company include inventories in (a) its statement of financial position and (b) the computation of its net income?
2. 2. The Internal Revenue Code allows some accountable events to be considered differently for income tax reporting purposes and financial accounting purposes, while other accountable events must be reported the same for both purposes. Discuss why it might be desirable to report some accountable events differently for financial accounting purposes than for income tax reporting purposes.
3. 3. Discuss the ways and conditions under which the FIFO and LIFO inventory costing methods produce different inventory valuations. Do not discuss procedures for computing inventory cost.
4. 4. Discuss the specific advantages and disadvantages of using the dollar-value LIFO application as compared to traditional LIFO methods. Ignore income tax considerations.