Chapter 8 discussion - During a period of steadily...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
During a period of steadily increasing purchase costs, which inventory flow assumption results in the highest reported profits? The lowest taxable income? The valuation of inventory that is closest to current replacement cost? Briefly explain your answers. In the FIFO method, oldest purchases are allocated to COGS first, while the current higher costs remain in the inventory. By assigning lower costs to the income statement, the businesses tend to report somewhat of higher profits, resulting in high tax payments. On other hand, LIFO method is the most controversial flow assumption method. In this method, the costs of the most recent (higher costs) purchases are allocated to the income statement. With the use of this method the income is based on most current market conditions, i.e. current sales revenue are offset by current cost of the merchandise sold. By doing so, the business reports lower profits resulting in low taxable income. Additionally, the FIFO method is closest to the current replacement method.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 12/13/2009 for the course ACCOUNTING ACCTG 50 taught by Professor B during the Fall '09 term at University of Phoenix.

Page1 / 2

Chapter 8 discussion - During a period of steadily...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online