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If you were attempting to maximize your net income, which inventory cost flow assumption would you...

If you were attempting to maximize your net income, which inventory cost flow assumption would you choose? Why? What conditions must exist for this method to produce the highest net income? When perpetual inventory records are kept, the results under the FIFO and LIFO methods are the same as they would be in a periodic inventory system.” Do you agree? Explain.

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Answer #1

FIFO gives higher net Income when Inventory prices are rising . This is because the closing stock will be valued at higher prices and Net Income will be higher for the period

LIFO gives higher net Income when When Inventory prices are declining. This is because the closing stock will be valued at the earlier inventories purchased at higher rates. Also the Cost of goods will be lower due to latest lower price purchased inventories being charged.

Do not Agree

Only FIFO method gives same results under Perpetual and Periodic inventory ( Closing stock and Cost of goods remains same).

LIFO method does not give same results for Perpetual and Periodic Inventory. Because in Perpetual inventory system stocks are issued for each sale from the latest inventory. But in Periodic system inventory is accumulated first and then issue is made for cost of goods sold on LIFO basis. Hence results are different.

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