# B lifo subtracts inflation from inventory costs by

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Chapter 7 / Exercise 7-27
Intermediate Accounting: Reporting and Analysis
Jones/Wahlen
Expert Verified
B ) LIFO subtracts inflation from inventory costs by charging the items purchased recently to cost of goods sold. As a result, ending inventory (assuming increasing prices) will be lower than FIFO or average cost. SOLUTION LIFO Effect – Inflation and Inventory Costs
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Chapter 7 / Exercise 7-27
Intermediate Accounting: Reporting and Analysis
Jones/Wahlen
Expert Verified
8-57 . C ) Cash flow was computed as follows: Revenue \$3,200,000   Cost of goods sold (2,800,000) Operating expenses (150,000) Income taxes (75,600 ) Cash flow \$ 174,400    If the company has any sales on account or payables, then the cash flow number is incorrect. It is assumed here that the cash basis of accounting is used.   SOLUTION LIFO Effect – Cash Flow
8-58 .   D) The company has extra cash because its taxes are less. The reason taxes are lower is because cost of goods sold (in a period of inflation) is higher under LIFO than FIFO. As a result, net income is lower which leads to lower income taxes. If prices are decreasing, the opposite effect results. SOLUTION - LIFO Effect – Tax impact and cash impact
8-59 Companies should disclose either the LIFO reserve or the replacement cost of the inventory LIFO Reserve LO 6 Explain the significance and use of a LIFO reserve. Special Issues Related to LIFO Illustration 8-19
8-60 6. Explain the significance and use of a LIFO reserve. 7. Understand the effect of LIFO liquidations. 8. Explain the dollar-value LIFO method. 9. Identify the major advantages and disadvantages of LIFO. 10. Understand why companies select given inventory methods. After studying this chapter, you should be able to: Valuation of Inventories: A Cost- Basis Approach 8 LEARNING OBJECTIVES LEARNING OBJECTIVES 1. Identify major classifications of inventory. 2. Distinguish between perpetual and periodic inventory systems. 3. Determine the goods included in inventory and the effects of inventory errors on the financial statements. 4. Understand the items to include as inventory cost. 5. Describe and compare the cost flow assumptions used to account for inventories.
8-61 Older, low cost inventory is sold resulting in a lower cost of goods sold, higher net income, and higher taxes. LIFO Liquidation The specific-goods approach to costing LIFO inventories is often unrealistic for two reasons: 1.Accounting cost of tracking each inventory item is expensive. 2.Erosion of the LIFO inventory can easily occur ( LIFO liquidation) which often distorts net income and leads to substantial tax payments. LO 7 Understand the effect of LIFO liquidations. Special Issues Related to LIFO
8-62 Illustration: Basler Co. has 30,000 pounds of steel in its inventory on December 31, 2014, with cost determined on a specific-goods LIFO approach. LO 7 Understand the effect of LIFO liquidations. LIFO Liquidation
8-63 Illustration: At the end of 2015, only 6,000 pounds of steel remained in inventory. Illustration 8-21 Illustration 8-20 LIFO Liquidation LO 7 Understand the effect of LIFO liquidations.
8-64 6. Explain the significance and use of a LIFO reserve. 7. Understand the effect of LIFO liquidations. 8. Explain the dollar-value LIFO method.