Question

Identify the inventory costing method best described by each of the following sepatate statements. Assume a period of increasing costs.
1. Yields a balance sheet inventory amount often markedly less than its replacement cost.
2. Results in a balance sheet inventory amount approximating replacement cost.
3. Provides a tax advantage (deferral) to a corporation when costs are rising.
4. Recognizes (mulches) recent costs against net sales.
5. The preferred method when each unit of product has unique features that markedly effect cost.

Answer 1

Answer:

1. Yields a balance sheet inventory amount often markedly less than its replacement cost.  LIFO

2. Results in a balance sheet inventory amount approximating replacement cost.  FIFO

3. Provides a tax advantage (deferral) to a corporation when costs are rising.  LIFO

4. Recognizes (mulches) recent costs against net sales.  LIFO

5. The preferred method when each unit of product has unique features that markedly effect cost. WEIGHTED AVERAGE

Explanation:

1. LIFO yields a balance sheet inventory amount often markedly less than its replacement cost.  The reason is because the in a period of rising costs, since the last stock of goods bought are sold first, this will result in the remaining stock of goods to be of lower costs as they had been bought at an earlier date at a cheaper rate.

2. FIFO results in a balance sheet inventory amount approximating replacement cost because the first set of goods purchased are sold first; and if the assumption holds that costs are rising with time, then the balance stock of goods would have been bought at a later date at a higher cost, hence the value of the balance (ending) inventory will be almost equal to its replacement cost.  

3. LIFO provides a tax advantage (deferral) to a corporation when costs are rising because it results in a lower ending inventory value since the more expensive inventory has been sold. Hence, the closing stock and Net income will be low and income tax will be low.

4. LIFO matches recent costs against net sales because the 'cost of sales' are made up of the recent purchases which are sold first

5. The preferred method when each unit of product has unique features that markedly effect cost is the WEIGHTED AVERAGE because it calculates the average period cost of all goods in stock and apportions the total to individual items.