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FIFO and LIFO
AICPA Adapted Part a. A company may compute inventory under one of various cost flow assumptions. Among these assumptions are first-in, first-out (FIFO) and last-in, first-out (LIFO). In the past, some companies have changed from FIFO to LIFO for computing portions or all of their inventory.
Required
1. Ignoring income tax, explain what effects a change from FIFO to LIFO has on a company’s net earnings and working capital.
2. Explain the difference between the FIFO assumption of earnings and operating cycle and the LIFO assumption of earnings and operating cycle.
Part b. A company using LIFO inventory may establish a “Reserve for the Replacement of LIFO Inventory” account.
Required
Explain why and how a company establishes this “reserve” account and where it should show the account on its statement of financial position.
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- Applying the lower-of-cost-or-market approach, what is the correct value that should be reported on the balance sheet for the inventory?arrow_forwardWhat is the ending inventory value?arrow_forwardHoosier Inc. uses the LIFO inventory cost method to prepare the company's tax return. Which method must the company use to account for inventory on their financial statements? Assume US GAAP and rising costs. O FIFO LIFO O Weighted average or LIFO Specific Identification O LIFO or FIFO, but not weighted averagearrow_forward
- Companies can use various methods to determine the cost of inventory, including FIFO, LIFO, and average cost. In a period in which the cost of inventory is rising, which of the following statements is true? The LIFO method will result in the lowest income tax expense. The LIFO method will result in the highest inventory balance at year-end. The average cost method will result in the highest net income. The LIFO method will result in the lowest cost of goods sold. The average cost method will result in the lowest inventory balance at year-end. The average cost method will result in the highest inventory balance at year-end. The FIFO method will result in the lowest net income. None of the listed choices are correct.arrow_forwardDuring periods of increasing costs, the use of the FIF0 method of costing inventory will result in a greater amount of net income than would result from the use of the LIFO cost method. True Falsearrow_forwardLower of cost or market: Multiple Choice Records only an increase in inventory value. Is only applicable to companies using LIFO. Reports all inventory items at full cost Can be applied to each individual item, major categories of items, or the whole inventory- Is only applicable to companies using FIFO.arrow_forward
- Inventory cost flow assumptions address accounting issues except when a.identical units of merchandise are acquired at different unit costs during the period. b.an item is sold and it is necessary to determine its cost. c.both of these choices address inventory accounting issues. d.neither of these choices addresses inventory accounting issues.arrow_forwardWhich one of the following statements is true? a. Income manipulation is difficult under LIFO.b. Accounting principles do not require that the inventory cost flow approximate the physical flow of goods.c. Companies may use LIFO for tax purposes and FIFO in the financial statements.d. In periods of declining prices, LIFO will result in the payment of less income taxes.arrow_forwardPetco Inc. uses the periodic inventory system. Assess the effect on net income of including goods in transit f.o.b shipping point in purchases, but not in ending inventory. a. Overstate net income. b. No effect on net income. O c. Not sufficient information is provided to assess the effect on net income. O d. Understate net income.arrow_forward
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