Detailed answer Acompany is considering two different inventory valuation methods:FIFO (First-In, First-Out) and LIFO (Last-In, First-Out). Discuss thepotential impact of each method on the company's financialstatements during periods of rising prices. Which method would resultin a higher cost of goods sold and lower net income? Explain the taximplications of using each inventory valuation method.

1. FIFO (First-In, First-Out) MethodDefinition:FIFO assumes that the oldest inventory (the first…

Answered: A company is considering two different…

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter9: Operating Activities

Section: Chapter Questions

Problem 7QE

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In rimes of rising prices, the inventory cost method that will yield the highest cost of goods sold is (a) LIFO. (b) weighted-average. (c) FIFO. (d) none of the above.
What does an increase in inventory imply? How would this increase in inventory be reported under the indirect method?
The following information is taken from a companys records. Applying the lower-of-cost-or-market approach, what is the correct value that should be reported on the balance sheet for the inventory?
When would using the FIFO inventory costing method produce higher inventory account balances than the LIFO method would? A. inflationary times B. deflationary times C. always D. never
What insights can be gained from inventory ratio analysis, such as inventory turnover ratio and number of days sales in inventory ratio?
What is the basic assumption underlying the gross profit method? How may the gross profit percentage for the prior year be modified to provide a better estimate of the inventory value?
Which accounting rule serves as the primary basis for the lower-of-cost-or-market methodology for inventory valuation? A. conservatism B. consistency C. optimism D. pessimism
Discuss the LIFO and FIFO cost flow assumptions relative to the issue of holding gains (inventory profits and inventory liquidation).
The inventory valuation method that has the advantages of assigning an amount to inventory on the balance sheet that approximates its current cost, and also mimics the actual flow of goods for most businesses is: Multiple Choice FIFO. Weighted average. LIFO. Specific identification. Lower of cost or market.
Which of the following statements is correct? Group of answer choices A)The choice of an inventory costing method is dependent upon the actual physical flow of the inventory. B)LIFO should be used during a period of increasing prices when the objective is to maximize the ending inventory value on the balance sheet. C)FIFO should be used during a period of decreasing prices when the objective is to maximize the gross profit reported on the balance sheet. D)The average cost method will result in an ending inventory balance which is somewhere between LIFO and FIFO when inventory prices are changing.
The management of Milque Corp. is considering the effects of various inventory-costing methods on its financial statements and its income tax expense. Assuming that the price the company pays for inventory is increasing, which method will: (a) provide the highest net income? Select the inventory-costing method that will provide the highest net income (b) provide the highest ending inventory? Select the inventory-costing method that will provide the highest ending inventory (c) result in the lowest income tax expense? Select the inventory-costing method that will result in the lowest income tax expense (d) result in the most stable earnings over a number of years? Select the inventory-costing method that will result in the most stable earnings over a number of years
Explain in 175 words: Explain how the inventory valuation method (LIFO or FIFO) chosen by a company affects the cost of goods sold and net income if prices are rising. What if the prices are declining?

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