Question

A recent article online noted that grocery stores have had to increase the price of eggs by 14% to make up for suppliers doubling the cost of wholesale eggs. Explain how each of the three inventory cost methods would impact the financial statements during this time of rising prices. Response should be no more than 1 page, double spaced. (10 points)

Answer 1

Impact of inventory cost method in Financial Statement

Key Points to be noted

• Without inflation all three inventory valuation methods would produce the same results. However, prices do tend to rise over the years, and the company's method costing method affects the valuation ratios.
• The FIFO method assumes that the first unit in inventory is the first until sold. FIFO gives a more accurate value for ending inventory on the balance sheet. On the other hand, FIFO increases net income and increased net income can increase taxes owed.
• The LIFO method assumes the last item entering inventory is the first sold. During periods of inflation LIFO shows ending inventory on the balance sheet much lower than what the inventory is truly worth at current prices, this means lower net income due to a higher cost of goods sold.
• The average cost method takes a weighted average of all units available for sale during the accounting period and then uses that average cost to determine the value of COGS and ending inventory.