In a period of decreasing prices, the inventory reported in Lee Ltd’s statement of financial position...

In a period of decreasing prices, the inventory reported in Lee Ltd’s statement of financial position is close to the current cost of the inventory, whereas Lam Ltd’s inventory is considerably above its current cost. Identify the inventory cost flow method used by each entity.

Can you answer and explain why?

Expert Solution

Lee Ltd. used FIFO (First-in First-out) cost flow method.

Explanation;

As we know that under FIFO method, first purchased inventory is sold first hence as a result latest purchased inventory will be shown as ending inventory in the financial statement of Lee Ltd.

It is given in the question that prices are decreasing thus last purchased inventory will be as ending inventory at currrent market price thus answer is FIFO cost flow method.

Lam Ltd. used LIFO (Last-in First-out) cost flow method.

Explanation;

As we know that under LIFO method, latest purchased inventory is sold first hence as a result first purchased inventory or oldest purchased inventory will be shown as ending inventory in the financial statement of Lam Ltd.

It is given in the question that prices are decreasing that means oldest inventory purchased will be at higher prices. So ending inventory as per LIFO method will carry cost above its current cost. In other words we can say due to gap in prices of oldest inventory and latest inventory there will be condition of higher ending inventory which will be above its current cost. Thus answer is LIFO cost flow method.

ekkarill92 answered 1 year ago

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