Problem Solving Survival Guide to accompany Financial Accounting, 8th Edition

SOLUTION TO EXERCISE 6-2

1. LIFO
2. FIFO
3. SI
4. A
5. LIFO
6. LIFO
7. FIFO
8. LIFO
9. LIFO
10. FIFO
11. FIFO
12. LIFO
13. FIFO
14. FIFO

TIP: Inventory pricing method, inventory costing method, and inventory cost method are synonymous terms for inventory cost flow method.

TIP: FIFO (first-in, first-out) means the cost of the first items put into inventory are used to price the first items out to cost of goods sold. Thus, the earliest acquisition prices are used to price cost of goods sold for the period, and the latest (most current) acquisition prices are used to price items in the ending inventory. LIFO (last-in, first-out) uses the most recent costs to price the units sold during the period, and it uses the oldest prices to cost the items in ending inventory. Thus, in a period of rising prices, the method that will yield the lowest net income on the income statement and the lowest ending inventory on the balance sheet is the LIFO method.

TIP: Some corporations prefer to use the LIFO method for purposes of determining taxable income on the entity's tax return because in periods of inflation, LIFO yields a lower taxable income figure than other inventory costing methods. LIFO is said to defer holding gains; therefore, the payment of related income taxes is deferred also. For example, assume two inventory items are purchased for $50. One is sold for $75 and the other is held for awhile. In the meantime, the supplier raises his price to $60. One more item is purchased to keep the inventory quantity at two. Then the old item ...