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Intermediate Accounting: Reporting...

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

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

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

1.

To determine

Ascertain the reason for including the inventory in a) the statement showing financial position and b) computation of net income.

Explanation

Inventory:

Inventory refers to the entire stock of goods purchased, goods utilized and goods maintained by the company in the course of the regular business activities.

The reasons for including the inventory:

  • In the statement showing financial position:

    The balance sheet or the statement showing financial position of a company includes all the resources owned by the company. The inventory is an asset to the company and is owned by the company...

2.

To determine

Identify the reasons for reporting certain transactions differently for the tax purposes from the financial reporting.

3.

To determine

Identify the reasons for FIFO and LIFO inventory costing methods to result in different inventory valuations.

4.

To determine

Identify the advantages and disadvantages of the Dollar value LIFO in reference to the traditional LIFO.

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