LIFO Liq - companys beginning inventory at LIFO cost shown...

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LIFO Liquidation What is a LIFO liquidation? It refers to an event where, for a company using LIFO, the number of units of inventory sold by the company during the year exceeds the number of units purchased during the year. As a result, the number of units in the ending inventory will be less than the number of units in the beginning inventory. How can a reader of the company’s financial statements (who does not have access to the company’s accounting records where information on the number of units sold, purchased, and in inventory is contained) know that a LIFO liquidation occurred? If the dollar amount of the company’s ending inventory at LIFO cost shown on its balance sheet for the current year, is less than the dollar amount of the
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Unformatted text preview: companys beginning inventory at LIFO cost shown in its balance sheet for last year, a LIFO liquidation occurred during the current year. What is the significance of a LIFO liquidation? 1. If a company using LIFO experiences a LIFO liquidation during the year, it may report higher net income and pay more in taxes than if it had used FIFO, even in a period of rising purchase prices for inventory. 2. Since end-of-year purchases are under the control of management which, in turn, can affect net income, the presence of a LIFO liquidation may mean that management is manipulating its net income....
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