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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Comparing inventory methods

Assume that a firm separately determined inventory under FIFO and LIFO and then compared the results.

a.    In each s pace that follows, place the correct sign [less than ( <), greater than (>), or equal (=)] for each comparison, assuming periods of rising prices.

1. FIFO inventory LIFO inventory
2. FIFO cost of merchandise sold LIFO cost of merchandise sold
3. FIFO net income LIFO net income
4. FIFO income taxes LIFO income taxes

b.    Why would management prefer to use LIFO over FIFO in periods of rising prices?

(a)

To determine

Comparing inventory methods:

The cost flow is different for different methods of valuation of inventory like LIFO, FIFO and weighted average inventory method. Therefore, the three methods result in different ending inventory value, cost of merchandise sold, net income and gross profit.

To place: correct signs for each of the following comparisons assuming in the period of rising prices.

Explanation

During the period of rising prices, the LIFO method matches the cost against sales on the income statement of the company. As the costs are higher in period of rising prices, the cost nearly matches with the revenues of the company. Therefore the net income under LIFO will be lesser.

This would lead to lower gross profit and this would offer lower income taxes to the company...

(b)

To determine

To discuss: the reason that LIFO method that would be preferred than FIFO method by the company in the period of rising prices.

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