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ORIE 350 Lecture 7

ORIE 350 Lecture 7 - ORIE 350 Lecture 7 Inventory cost...

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Inventory(A) Historical Cost Adjustment Lower Cost ORIE 350 Lecture 7 Inventory cost methods 1. FIFO(our oldest items are sold in the inventory and newest are in ending inventory) a. This is equivalent to LISH(Last in Still Here) b. Recent cost in ending inventory c. Balance sheet has an accurate, up-to-date figure in inventory d. Cost of goods sold are out of date e. The income statement is not as accurate if cost has changed a lot f. In time of rising prices, items sold has relatively low CGS and FIFO shows higher net income and hence higher taxes 2. LIFO a. Newest items are sold and oldest items remain in ending inventory b. The equivalent statement is FISH (first in still here) c. CGS is up to date-> accurate income statement d. Inaccurate balance sheet as ending inventory is out-of-date e. If costs are increasing over time, LIFO gives high cost of goods sold, lower net income and lower taxes f. LIFO liquidation occurs when old, low cost inventory is sold, resulting in high tax rate g. Solution: 1. Keep inventory level high enough at the end of each period
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