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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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Assuming no beginning inventory, what can be said about the trend of inventory prices if cost of goods sold computed when inventory is valued using the FIFO method exceeds cost of goods sold when inventory is valued using the LIFO method?

  1. a. Prices decreased.
  2. b. Prices remained unchanged.
  3. c. Prices increased.
  4. d. Price trend cannot be determined from information given.

To determine

Identify the trend of inventory prices.

Explanation

FIFO: In First-in-First-Out method, items purchased initially are sold first. So, the value of the ending inventory consist the recent cost for the remaining unsold items.

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.

Explanation for the given options:

a. Prices decreased. When cost of goods sold is determined under FIFO method exceeds cost of goods sold under LIFO method, the inventory prices tends to diminish because the FIFO methods values the inventory at older prices that includes the prices of units of earlier purchase. In LIFO method, the inventory is valued at the recent prices. Thus, the price of the inventory would decrease. Therefore, this option is the correct answer.

b...

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