   Chapter 7, Problem 4DQ

Chapter
Section
Textbook Problem

If merchandise inventory is being valued at cost and the price level is decreasing, which of the three methods of costing—FIFO, LIFO, or weighted average cost—will yield (a) the highest inventory cost, (b) the lowest inventory cost, (c) the highest gross profit, and (d) the lowest gross profit?

(a)

To determine

Cost flow assumptions:

Cost flow assumptions can be referred to as the method which determines the flow of costs when an inventory is sold. Instead of keeping a track record for cost of each product sold, a company adopts these methods, and identifies which units were sold. It differs from specific identification method because the actual physical movement of goods may be unrelated to the flow of costs.

To state: which of the three methods of costing will yield highest inventory cost.

Explanation

In a period of decreasing prices, the LIFO method shows highest inventory cost...

(b)

To determine

To state: which of the three methods of costing will yield lowest inventory cost.

(c)

To determine

To state: which of the three methods of costing will yield highest gross profit.

(d)

To determine

To state: which of the three methods of costing will yield lowest gross profit.

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