As compared with the FIFO method of costing inventories, does the LIFO method re
ID: 2580474 • Letter: A
Question
As compared with the FIFO method of costing inventories, does the LIFO method result in a larger or smaller net income in a period of rising prices? What is the comparative effect on net income in a period of falling prices? 5. 6-Lower-of-cost-or-market. Determine the proper unit inventory price in the following independent cases by applying the lower of cost or market rule. Circle your choice. Cost Net realizable value Net realizable value less normal profit Market replacement cost $7.80 $10.50 $11.80 $6.00 $7.20 8.85 10.00 12.20 4.25 6.90 11.40 7.90 10.10 12.50 4.00 5.40 8.15 9.00 3.75 6.50 7-Lower-of-cost-or-market. The December 31, 2017 inventory of Gwynn Company consisted of four products, for which certain information is provided below. Replacement Estimated Expected Normal Profit Product Original Cost CostDisposal Cost Selling Price on Sales $24.00 $42.00 $120.00 $19.00 $22.00 $40.00 $115.00 $15.80 $6.50 $10.00 $25.00 $4.00 $40.00 $48.00 $190.00 $26.00 20% 25% 30% 1096 Instructions Using the lower-of-cost-or-market approach applied on an individual-item basis, compute the inventory valuation that should be reported for each product on December 31, 2017.Explanation / Answer
Answer to Question no. 5
In FIFO method of costing inventories, it is assumed that the Cost which has been purchased first will be sold first. Whereas, in LIFO method of costing inventories, it is assumed that the good which has been purchased last will be sold first. Usually, the goods which are purchased at a later date are purchased at a higher price.
That is why, the LIFO method results in lesser Net Income, as the goods which has been purchased at higher price is sold first, which increase the Cost of goods sold resulting in lesser Net Income.
In the period of falling price, the LIFO method would result in higher Net Income, as the goods which are purchased at a later date is at less amount to previous purchases. The later purchased which are assumed to have been sold will result in lesser Cost of goods sold and resulting higher Net Income.
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