Jeep Australia purchases vehicles from Jeep USA using American dollars. The pric

Question

Jeep Australia purchases vehicles from Jeep USA using American dollars. The price is agreed in

advance and does not change for three years. Jeep Australia records the value of these vehicles

purchased in the books of business in Australian dollars. Assume over the last 12 months the

Australian dollar has appreciated significantly against the US dollar. Which inventory costing

method gives the highest profits at the end of the period for Jeep Australia?

a. First-in, first-out

b. Last-in, first-out

c. First-out, first in

d. Last out, first-in

e. Weigted Average

Explanation / Answer

Solution:

Since Australian Dollar has appreciated singnificantly therefore Inventory cost of last purchases will be lower. Under Last in first out (LIFO) method, last purchases will be sold first and becomes part of Cost of Goods sold and therefore Cost of goods sold will be lesser. Hence it will result in highest profits.

Hence option b. "Last in first out" will be correct answer.

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