The following was taken from Driver-Harris Company’s 1990 Annual Report: We woul
ID: 2430363 • Letter: T
Question
The following was taken from Driver-Harris Company’s 1990 Annual Report: We would like to call your attention to a major effect caused by inflation. Our results are significantly affected by the use of LIFO accounting. We believe that this method better reflects the results of operations in inflationary times, even though, had the FIFO method been used for inventory valuation, our 1990 results before income taxes would have been approximately $1,800,000 better. Unfortunately, some of our competitors throughout the world are still using the FIFO method, and thus tend to offer unrealistically low sales prices, based on outdated costs. Which of the following is true?
The FIFO inventory costing method reports higher quality earnings in inflationary times.
The LIFO reserve is $1,800,000 at the end of 1990.
FIFO firms tend to offer unrealistic sales prices based on outdated costs.
The accounting method for inventory should have nothing to do with a company’s pricing strategy
A.The FIFO inventory costing method reports higher quality earnings in inflationary times.
B.The LIFO reserve is $1,800,000 at the end of 1990.
C.FIFO firms tend to offer unrealistic sales prices based on outdated costs.
D.The accounting method for inventory should have nothing to do with a company’s pricing strategy
Explanation / Answer
Answer is:
A. The FIFO inventory costing method reports higher quality earnings in inflationery times.
Explanations: Under FIFO method closing stock is valued at recent market price. In inflationary times the materials prices countiniously rises, so if the closing stock is valued at a higher price then the profit will also be increased due to higher amount of closing stock.
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