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Chapter 2: 3DQ (page 112)

With inflation, what are the implications of using LIFO and FIFO inventory methods? How do they affect the cost of goods sold?

Short Answer

Expert verified

Due to inflation in the market, the cost of goods sold decreases if the company use the FIFO inventory valuation method. It leads to an increase in the net income of the company. If the company uses the LIFO inventory valuation method, the cost of goods sold increases and leads to the decreases in the net income of the company.

Step by step solution

01

LIFO inventory valuation method

Under LIFO (last in first out) inventory valuation model, company sells or uses the newer unit first. In case of inflation, the last units purchased in the organization are more costly. Hence, the cost of goods sold increases and net income of the company decreases.

02

FIFO inventory valuation method

Under FIFO (First in first out) inventory valuation model, a company sells the older units first which are purchased by an organization during inflation at lower cost. Hence, the cost of goods sold decreases in this case and the net income of the company increases.

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Most popular questions from this chapter

Dr. Zhiva虁go Diagnostics Corp.鈥檚 income statement for 20X1 is as follows

Sales\( 2790000
Cost of goods sold1790000
Gross profits\) 1000000
Selling and administrative expenses302000
Operating profits\( 698000
Interest Expense54800
Income before tax\) 643200
Taxes 30%192960
Income after tax$ 450240

b. Assume that in 20X2, sales increase by 10 percent and cost of goods sold increases by 20 percent. The firm is able to keep all other expenses the same. Assume a tax rate of 30 percent on income before taxes. What is income after taxes and the profit margin for 20X2?

Stilley Corporation had earnings after taxes of \(436,000 in 20X2 with 200,000 shares outstanding. The stock price was \)42.00. In 20X3, earnings after taxes declined to \(206,000 with the same 200,000 shares outstanding. The stock price declined to \)27.80.

a. Compute earnings per share and the P/E ratio for 20X2.

b. Compute earnings per share and the P/E ratio for 20X3.

c. Give a general explanation of why the P/E changed. You might want to

consult the text to explain this surprising result.

Explain why the statement of cash flows provides useful information that goes beyond income statement and balance sheet data.

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Given the following information, prepare an income statement for Jonas Brothers Cough Drops.

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195,000

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Interest expenses

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Cost of goods sold

560,000

Taxes

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