Why do companies use cost flow assumptions to

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3.Why do companies use cost flow assumptions to determine inventory cost? 4. Assume that prices that Deere and CNH Global pay for inventory typically increase over time. CNH uses the first-in, first out (FIFO) cost flow assumption to measure its inventories. In general terms, how do the balance sheet values for inventories of the two companies differ due to their cost flow assumptions? What numbers on the two companies’ income statements would differ? What if prices typically decrease over time? Under FIFO method inventory is valued earliest purchase price. The closing value of inventory is values at the latest purchase price. Under LIFO method inventory is valued at latest purchase price. Deere & Co uses LIFO method and CNH Global utilizes the FIFO method. As inventory prices increase for both companies, the following would be the impact: the inventory for Deere & Co. will be understated as it would value at the earliest purchase price. The inventory for CNH Global would reflect the current market price as it would be valued at the latest
purchase price. In the income statement the COGS would be affected based on the inventory valuation method. THE COGS for Deere & Co. would be higher than CNH Global. If prices decrease over time, inventory will be overstated for Deere & Co. and CNH Global would reflect the current market price.

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