Question

PQR Ltd is a US-based retailer and it uses LIFO method for valuation of inventory. Following information is obtained from its inventory records for 2019:

Inventory	Units	Unit price $
Opening balance	5000	10
January purchases	5000	12
April purchases	5000	14
June purchases	5000	16
Sold during 2019	19000

You are require to answer the following (no calculations are necessary):

1. In light of US-GAAP, what are your key observations regarding cost of inventory balance and units sold?                                                                                        

2. What are the potential consequences of current inventory management on profitability and availability of inventory?

Answer 1

a. US Gapp alllows LIFO method .

Under this method,

cost of inventory balance=1000*10=10,000

cost of units sold =5000*(10+12+14+16)-10000=2600000-10000=2,590,000

Key observations: Cost of inventory balance will be $10 per piece,. It will be lowest since price has rising trend. Cost of units sold will be highest

b.Potential Consequence: If prices go up , cost of goods sold will be higher and the inventory balance will be shown at lower value than the market price. Consequently Profitability will be lower.

Reverse will happen if the prices decrease.