XYZ Company uses the LIFO method for inventory costing. The company reported tot
ID: 2380480 • Letter: X
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.
4. Which inventory method, FIFO or LIFO, provides a better measure for cost of goods sold on the income statement during the normal inflationary period and why?
Explanation / Answer
Assuming by better measure for cost of goods sold on the income statement you mean higher profits, FIFO method would provide a better measure during inflationary periods. This is becuase the goods sold will be of a lower cost as we're selling the goods acquired before at a relatively lower cost as compared to the current prices. So the goods being purchased now, which are of a higher cost, form part of the closing stock. Closing stock and profit are directly related. That is, higher the closing stock, higher the profits. And cost of goods sold and profit are inversely related. That is, lower the cost of goods sold, higher the profits.
Therefore by selling lower cost goods and keeping the higher cost goods in the closing stock, we're increasing our profits for the period.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.