Proponents of the LIFO inventory cost flow assumption argue that this costing methods is superior to the alternatives be...
Proponents of the LIFO inventory cost flow assumption argue that this costing methods is superior to the alternatives because it results in better matching of revenue and expense. A. explain why"better Matching" occurs with LIFO? B. What is the impact on the carrying value of inventory in the balance sheet when LIFO rather than FIFO is used during periods of inflation?
Homework Answers
Under LIFO method of valuation of inventory, inventory purchased later is sold first. Known as Last in First out method.
A. LIFO method results in "better matching" of revenue and expense because inventory purchased later represents the revenue and expense of latest time period. Because inventory purchased earlier is of lesser value as compared to recent time.
B. During periods of inflation, it is preferable to use LIFO method. So during inflation, when LIFO method is used, the carrying value of inventory in the balance sheet is of lower amount, because latest purchased inventory is first sold out, and the remaining is left out of older stock. Costs are increased in times of inflation, so older stock is at lower value.
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