Discuss why you think the authors’ statement below causes confusion among students in regard to understanding the differences among FIFO, LIFO, and average cost:
Students have a difficult time understanding the difference between the physical flow of inventory and the cost flow assumption. Specifically, they do not understand that the actual physical flow of goods relates to a process undertaken by a manufacturer or merchandiser, while the cost flow assumption relates to acct reporting activities
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Jun 22nd, 2015
The difference between FIFO and LIFO results from the request in which changing unit expenses are expelled from stock and turn into the expense of merchandise sold. At the point when the unit expenses have expanded, LIFO will bring about a bigger expense of products sold and a littler consummation stock contrasted and FIFO. In the event that the unit expenses are stable, there will be next to zero distinction in the middle of FIFO and LIFO. Likewise take note of that the request in which the expenses are expelled from stock is autonomous of the request in which the physical units are expelled from stock.
To delineate the distinction in the middle of FIFO and LIFO, how about we accept that a retail location conveyed stand out item amid its first year of business. It bought 30 units in January at an expense of $40 every, 30 units in June at $43 each, and 30 units in November at $46 each. In this manner, for the year the retailer obtained 90 units with an aggregate genuine expense of $3,870 [30X$40 + 30X$43 + 30X$46]. How about we additionally accept that 70 units were sold and that 20 units stay in stock toward the end of the year.
FIFO expect that the first expenses (the most seasoned expenses) for 70 of the units will be expelled from stock and will be expensed on the wage articulation as the expense of products sold. Consequently, the FIFO expense stream supposition is that the 70 units sold had an expense of $2,950 [30X$40 + 30X$43 + 10X$46]. FIFO likewise accept that the 20 units staying in stock had the latest expense of $46 each for an aggregate of $920.
LIFO expect that the last expenses (the latest real expenses) for 70 units will be expelled from stock and will be expensed on the pay explanation as the expense of products sold paying little respect to which units were really sent to clients. In this way, the LIFO expense stream presumption is that the 70 units sold had an expense of $3,070 [30X$46 + 30X$43 + 10X$40]. LIFO additionally accept that the 20 units staying in stock had the most established expense of $40 each for an aggregate of $800.
In our illustration, LIFO brings about $120 less of closure stock and $120 less of gross benefit (on the grounds that the expense of products sold was bigger). The lower gross benefit and the related lower assessable salary for a U.S. organization can mean less pay charge installments if the organization is gainful and has critical and expanding levels of stock.
Jun 22nd, 2015
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Jun 22nd, 2015
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