The lifo reserve or allowance account is a contra

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The LIFO Reserve (or Allowance) account is a contra account to inventory. Example : ABC Company uses FIFO for internal reporting purposes and LIFO for external reporting. On January 1, 2012, ABC had a balance of $10,000 in the LIFO Reserve account. On December 31, 2012 it had the following: LIFO Reserve FIFO ending inventory $160,000 LIFO ending inventory 135,000 LIFO Reserve $ 25,000 Cost of goods sold ($25,000 – 10,000) 15,000 LIFO Reserve 15,000 Journal entry to record the increase in the reserve: C o m pa nie s  s ho uld dis c lo s e  e ithe r the  LIFO  re s e rve  o r the  re plac e m e nt c o s t  o f the  inve nto ry.
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8-17 LIFO Liquidation LIFO inventory costs in the balance sheet are “out of date” because they reflect old purchase transactions. LIFO inventory costs in the balance sheet are “out of date” because they reflect old purchase transactions. When prices rise (fall) . . . If inventory declines, these “out of date” costs may be charged to current earnings. If inventory declines, these “out of date” costs may be charged to current earnings. This LIFO liquidation results in “paper profits (losses).” This LIFO liquidation results in “paper profits (losses).” A material effect on net income of LIFO layer liquidation must be disclosed in a note to the financial statements.
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8-18 Older, low cost inventory is sold resulting in a lower cost of goods sold, higher net income, and higher taxes. Assume that A-OK Auto Company starting using LIFO in 2009 when the cost of Part #567 was $1.00. On December 31, 2012, it reports the following for Part #567: Beginning inventory: 500 units @ $1.00 = $ 500 Purchases: 800 units @ $5.00 = $4,000 Goods available for sale $4,500 Suppose the company sold 1,200 units during 2012. Cost of goods sold would include 400 units @ $1.00 which is significantly below the current cost of those units. This would make Cost of Goods Sold low and Net Income and Taxes high. LIFO Liquidation
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8-19 End of Chapter 8 – Part 2
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The LIFO Reserve or Allowance account is a contra account...

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