XYZ Company uses the LIFO method for inventory costing. The company reported tot

Question

XYZ Company uses the LIFO method for inventory costing. The company reported total inventory of $441 million on their balance sheet as of 12/31/2012. It reported a LIFO reserve of $72 million at the beginning of the 2012 fiscal year and a LIFO reserve of $86 million at the end of the 2012 fiscal year. Cost of goods sold reported on the 2012 income statement was $2,900 million.

3. Which inventory method, FIFO or LIFO, provides a better (more informative) measure for inventory on the balance sheet during the normal inflationary period and why?

Explanation / Answer

LIFO allocates the most recent purchase prices (highest in times of rising prices) to the cost of goods sold doing well to match revenues from items sold with recent costs.
-During periods of changing prices , LIFO is the most informative and conservative accounting method for income statement/COGS purposes since it provides a better measure of current income and future profitability

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