How would reported income differ if LIFO rather than FIFO were used when purchase prices are...

How would reported income differ if LIFO rather than FIFO were used when purchase prices are rising? When purchase prices are falling? How would the balance sheet accounts be affected if LIFO rather than FIFO were used when purchase prices are rising? When purchase prices are falling?

Expert Solution

Impact on reported income

When purchase prices are rising

The income reported would be lower under LIFO method compared to FIFO method. The reason being inventory is valued at lower cost and current purchase prices would be charged to cost of goods sold and it will be higher which will reduce the profits

When purchase prices are falling

The income reported would be higher under LIFO method compared to FIFO method. The reason being inventory is valued at higher price of earlier purchased lots and current lower purchase prices would be charged to cost of goods sold which will increase the profits.

Impact on Balance Sheet accounts

When purchase prices are rising

The Inventory would be valued at lower cost compared to FIFO method. Since the profits reported are lower than FIFO method the retained earnings balance would be lower compared to FIFO method

When purchase prices are falling

The Inventory would be valued at higher cost compared to FIFO method. Since the profits reported is higher than FIFO method the retained earnings balance would be higher compared to FIFO method.

ekkarill92 answered 2 years ago

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