8

Inventories:
Measurement

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA

McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
 Recording and Measuring Inventory
Types of Inventory

Merchandise Manufacturing
Inventory Inventory
Goods acquired for • Raw Materials
resale • Work-in-Process
• Finished Goods
8-2
 Manufacturing Inventories
Raw Work in Finished
Materials Process Goods

  $XX
 $XX

Direct
Labor

  Cost of Goods Sold

$XX
Manufacturing
Overhead

   Raw
Raw materials
materials purchased
purchased
 Direct
Direct labor
labor incurred
incurred
 Manufacturing
Manufacturing overhead
overhead incurred
incurred
Raw
Raw materials
materials used
 used
Direct
Direct labor
labor applied
applied
 Manufacturing
Manufacturing overhead
overhead applied
applied
 Work
Work inin process
process transferred
transferred to
to finished
finished goods
goods
 Finished
Finished goods
goods sold
sold
8-3

 Inventory Systems
Two accounting systems are used to record
transactions involving inventory:

Perpetual
Perpetual Inventory
Inventory Periodic
Periodic Inventory
Inventory
System
System System
System
The
The inventory
inventory
account
account is
is The
The inventory
inventory
continuously
continuously account
account is is adjusted
adjusted
updated
updated as
as at
at the
the end
end of
of aa
purchases
purchases and
and reporting
reporting cycle.
cycle.
sales
sales are
are made.
made.
8-4
 Perpetual Inventory System
Lothridge Wholesale Beverage Company (LWBC) begins
2011 with $120,000 in inventory. During the period it
purchases on account $600,000 of merchandise for resale
to customers.
2011
Inventory 600,000
Accounts payable 600,000
Purchase of merchandise inventory on account

Returns of inventory are credited to the inventory

account.
Discounts on inventory purchases can be recorded
using the gross or net method.

8-5
 Perpetual Inventory System
During 2011, LWBC sold, on account, inventory with a retail
price of $820,000 and a cost basis of $540,000, to customers.
2011
Inventory 600,000
Accounts payable 600,000
Purchase of merchandise inventory on account.

2011
Accounts receivable 820,000
Sales revenue 820,000
Record sales on account.

Cost of goods sold 540,000

Inventory 540,000
Record cost of goods sold.

8-6
 Periodic Inventory System
The periodic inventory system is not designed to track
either the quantity or cost of merchandise inventory. Cost
of goods sold is calculated, using the schedule below, after
the physical inventory count at the end of the period.

Beginning Inventory
+ Net Purchases
Cost of Goods Available for Sale
- Ending Inventory
= Cost of Goods Sold

8-7
 Periodic Inventory System
Lothridge Wholesale Beverage Company (LWBC) begins
2011 with $120,000 in inventory. During the period it
purchases on account $600,000 of merchandise for resale
to customers.
2011
Purchases 600,000
Accounts payable 600,000
Purchase of merchandise inventory on account

8-8
 Periodic Inventory System
During 2011, LWBC sold, on account, inventory with a retail
price of $820,000 to customers, and a cost basis of $540,000.

2011
Accounts receivable 820,000
Sales revenue 820,000
Record sales on account.

No entry is made to record Cost of Goods Sold. A physical count

of Ending Inventory shows a balance of $180,000. Let’s
calculate Cost of Goods Sold at the end of 2011.

8-9
 Periodic Inventory System
Calculation of Cost of Goods Sold
Beginning inventory $ 120,000
Plus: Purchases 600,000
Cost of goods available for sale 720,000
Less: Ending inventory (180,000)
Cost of goods sold $ 540,000

We need the following adjusting entry to record cost of good sold.

December 31, 2011
Cost of goods sold 540,000
Inventory (ending) 180,000
Inventory (beginning) 120,000
Purchases 600,000
To adjust inventory, close purchases, and record cost of goods sold.

8 - 10
 Comparison of Inventory Systems
Transaction or
Periodic Inventory Perpetual Inventory
Event

Routine purchases of Costs debited to Costs debited to

various inventory items purchases account inventory account

Debit Cost of goods

No accounting entries
Sale of inventory sold and credit
made to inventory
inventory

Physical count to
End-of-period No separate
determine ending
accounting entries and determination of cost of
inventory and cost of
related activities goods sold necessary
goods sold

8 - 11
 What is Included in Inventory?

General Rule
All goods owned by the company on the inventory
date, regardless of their location.

Goods
Goodsin
in Transit
Transit Goods
Goodson
on
Consignment
Consignment

Depends
Depends on
on FOB
FOB
shipping
shippingterms.
terms.

8 - 12
 Expenditures Included in Inventory

Purchase
Purchase
Invoice
InvoicePrice
Price Returns
Returnsand
and
Allowances
Allowances

Freight-in
Freight-inon
on Purchase
Purchase
Purchases
Purchases Discounts
Discounts

8 - 13
 Purchase Returns
On November 8, 2011, LWBC returns merchandise that had a cost
to LWBC of $2,000, and a cost basis to the seller of 1,600.

Periodic Inventory Method Perpetual Inventory Method

November 8, 2011
Accounts payable 2,000 Accounts payable 2,000
Purchase returns and allowances 2,000 Inventory 2,000

Returns of inventory are credited to the Purchase Returns

and Allowances account when using the periodic
inventory method.
The returns are credited to Inventory using the perpetual
inventory method.
8 - 14
 Purchase Discounts
Gross Method Net Method
October 5, 2011
Purchases 20,000 Purchases 19,600
Accounts payable 20,000 Accounts payable 19,600

October 14, 2011

Accounts payable 14,000 Accounts payable 13,720
Purchase discounts 280 Cash 13,720
Cash 13,720

November 4, 2011
Accounts payable 6,000 Accounts payable 5,880
Cash 6,000 Interest expense 120
Cash 6,000

Discount terms are $20,000

2/10, n/30. Partial payment not x 0.02
$14,000 made within the $ 400
x 0.02 discount period -120
$ 280 $ 280
8 - 15
 Inventory Cost Flow Assumptions

•• Specific
Specific identification
identification
•• Average
Average cost
cost
•• First-in,
First-in, first-out
first-out (FIFO)
(FIFO)
•• Last-in,
Last-in, first-out
first-out (LIFO)
(LIFO)

8 - 16
 Perpetual Average Cost
Picture This, LLC, uses a standard frame size for
all pictures to hold down product costs. The
following schedule shows the frame inventory for
Picture This, LLC, for September.
The physical inventory count at September 30
shows 1,400 frames in ending inventory.
Use the perpetual average cost method to
determine:
(1) Ending inventory cost
(2) Cost of goods sold
8 - 17
 Perpetual Average Cost
Picture This, LLC
Frame Inventory
Date Units $/Unit Total
Beg. Inventory 1,200 $ 22.00 $ 26,400.00
9/3 900 24.00 21,600.00
9/15 550 25.00 13,750.00
9/21 600 27.00 16,200.00
9/29 800 28.00 22,400.00
Goods Available for Sale 4,050 $ 100,350.00
Ending Inventory (1,400) -
Date Sales Units
Cost of Goods Sold 2,650 9/15 1,000
9/22 700
9/30 950
2,650

8 - 18
 Perpetual Average Cost

Date Purchased Average Cost Sold Balance

Beg. Inv. 1,200 x $ 22.00 = 26,400 $ 22.00 $ 26,400.00
9/3 900 x 24.00 = 21,600 22.86 48,000.00
9/15 550 x 25.00 = 13,750 23.30 61,750.00
9/15 1000 x 23.30 = 23,300.00 38,450.00

$61,750 ÷ (1,200 + 900 + 550) = $23.30 rounded

8 - 19
 Perpetual Average Cost

Date Purchased Average Cost Sold Balance

Beg. Inv. 1,200 x $ 22.00 = 26,400 $ 22.00 $ 26,400.00
9/3 900 x 24.00 = 21,600 22.86 48,000.00
9/15 550 x 25.00 = 13,750 23.30 61,750.00
9/15 2,650 1000 x 23.30 = 23,300.00 38,450.00
9/21 600 27.00 16,200 24.29 54,650.00
9/22 700 24.29 17,003.00 37,647.00

[(1,650
[(1,650 ×× $23.30)
$23.30) ++ (600
(600 ×× $27)]
$27)] ÷÷ 2,250
2,250 == $24.29
$24.29 rounded
rounded

8 - 20
 Perpetual Average Cost

Date Purchased Average Cost Sold Balance

Beg. Inv. 1,200 x $ 22.00 = 26,400 $ 22.00 $ 26,400.00
9/3 900 x 24.00 = 21,600 22.86 48,000.00
9/15 550 x 25.00 = 13,750 23.30 61,750.00
9/15 2,650 1000 x 23.30 = 23,300.00 38,450.00
9/21 600 x 27.00 = 16,200 24.29 54,650.00
9/22 700 x 24.29 = 17,003.00 37,647.00
9/29 800 x 28.00 = 22,400 25.55 60,047.00
9/30 950 x 25.55 = 24,272.50 35,774.50
1,550 × $ 24.29 = $ 37,650
800 × 28.00 = 22,400
2,350 $ 60,050
Weighted Average Cost $ 25.55

Ending inventory = 1,400 units × $25.55 = $35,770

Rounding error

8 - 21
 Last-In, First-Out
Periodic Inventory System
Picture This, LLC
Frame Inventory
Date Units $/Unit Total
Beg. Inventory 1,200 $ 22.00 $ 26,400.00
9/3 900 24.00 21,600.00
9/15 550 25.00 13,750.00
9/21 600 27.00 16,200.00
9/29 800 28.00 22,400.00
Goods Available for Sale 4,050 $ 100,350.00
Ending Inventory 1,400 35,774.50
Cost of Goods Sold 2,650 $ 64,575.50

8 - 22
 Weighted-Average Periodic System
Let’s use the same information to assign costs to
ending inventory and cost of goods sold using the
periodic system.
Ending Inventory
(1,400 units)
Beginning Inventory
Available
Available
(1,200 units)
for
forSale
Sale
Purchases (4,050
(4,050units)
units)
(2,850 units)
Goods Sold
(2,650)

$100,350 ÷ 4,050 = $24.7778 weighted-

average per unit cost
8 - 23
 Weighted-Average Periodic System
Picture This, LLC
Frame Inventory
Date Units $/Unit Total
Beg. Inventory 1,200 $ 22.00 $ 26,400.00
9/3 900 24.00 21,600.00
9/15 550 25.00 13,750.00
9/21 600 27.00 16,200.00
9/29 800 28.00 22,400.00
Goods Available for Sale 4,050 $ 100,350.00
Ending Inventory (1,400) $ 24.7778 (34,688.92)
Cost of Goods Sold 2,650 $ 24.7778 $ 65,661.08

8 - 24
 First-In, First-Out (FIFO)

The FIFO •• The

The cost
cost ofof the
the oldest
oldest
method inventory
inventory items
items are
are
assumes that charged
charged toto COGS
COGS
items are sold when
when goods
goods are are sold.
sold.
in the •• The
The cost
cost ofof the
the
chronological newest
newest inventory
inventory
order of their items
items remain
remain in in
acquisition. ending
ending inventory.
inventory.

8 - 25
 First-In, First-Out (FIFO)

Even
Even thoughthough thethe periodic
periodic
and
and thethe perpetual
perpetual
approaches
approaches differ differ inin the
the
timing
timing of of adjustments
adjustments to to
inventory
inventory .. .. ..
.. .. .. COGS
COGS and and Ending
Ending
Inventory
Inventory Cost Cost are
are thethe
same
same underunder both
both
approaches.
approaches.

8 - 26
 First-In, First-Out (FIFO)
Periodic Inventory System
Picture This, LLC
Frame Inventory
Date Units $/Unit Total
Beg. Inventory 1,200 $ 22.00 $ 26,400.00
9/3 900 24.00 21,600.00
9/15 550 25.00 13,750.00
9/21 600 27.00 16,200.00
9/29 800 28.00 22,400.00
Goods Available for Sale 4,050 These $ 100,350.00
Theseare
are the
the1,400
1,400
Ending Inventory 1,400 most 38,600.00
most recently
recently
Cost of Goods Sold 2,650 $ 31,050.00
acquired units.
acquired units.

8 - 27
 First-In, First-Out (FIFO)
Periodic Inventory System
Picture This, LLC
Frame Inventory
Date Units $/Unit Total
Beg. Inventory 1,200 $ 22.00 $ 26,400.00
9/3 900 24.00 21,600.00
9/15 550 25.00 13,750.00
9/21 600 27.00 16,200.00
9/29 800 28.00 22,400.00
Goods Available for Sale 4,050 $ 100,350.00
Ending Inventory 1,400 38,600.00
Cost of Goods Sold 2,650 $ 61,750.00

8 - 28
 First-In, First-Out (FIFO)
Periodic Inventory System
Picture This, LLC
Frame Inventory
Date Units $/Unit Total
Beg. Inventory 1,200 $ 22.00 $ 26,400.00
9/3 900 24.00 21,600.00
9/15 550 25.00 13,750.00
9/21 600 27.00 16,200.00
9/29 800 28.00 22,400.00
Goods Available for Sale 4,050 These $ 100,350.00
Theseare
arethe
thefirst
first
Ending Inventory 1,400 2,650 38,600.00
2,650 units
units
Cost of Goods Sold 2,650 $ 61,750.00
acquired.
acquired.

8 - 29
 First-In, First-Out (FIFO)
Periodic Inventory System
Picture This, LLC
Frame Inventory
Date Units $/Unit Total
Beg. Inventory 1,200 $ 22.00 $ 26,400.00
9/3 900 24.00 21,600.00
9/15 550 25.00 13,750.00
9/21 600 27.00 16,200.00
9/29 800 28.00 22,400.00
Goods Available for Sale 4,050 $ 100,350.00
Ending Inventory 1,400 38,600.00
Cost of Goods Sold 2,650 $ 61,750.00

8 - 30
 Last-In, First-Out (LIFO)

The LIFO •• The

The cost
cost of
of the
the
method newest
newest inventory
inventory
assumes that items
items are
are charged
charged toto
the newest COGS
COGS when
when goods
goods
items are sold are
are sold.
sold.
first, leaving the •• The
The cost
cost of
of the
the oldest
oldest
older units in inventory
inventory items
items
inventory. remain
remain in
in inventory.
inventory.

8 - 31
 Last-In, First-Out (LIFO)
Unlike
Unlike FIFO,
FIFO, using
using the
the
LIFO
LIFO method
method may may
result
result in
in COGS
COGS and and
Ending
Ending Inventory
Inventory
Cost
Cost that
that differ
differ
under
under the
the periodic
periodic
and
and perpetual
perpetual
approaches.
approaches.

8 - 32
 Last-In, First-Out
Date Sales Units
9/15 1,000 Perpetual Inventory System
9/22 700
9/30 950
2,650
Picture This, LLC
Frame Inventory
Date Units $/Unit Total
Beg. Inventory 1,200 $ 22.00 $ 26,400.00
9/3 900 24.00 21,600.00
9/15 550 25.00 13,750.00
9/21 600 27.00 16,200.00
9/29 800 28.00 22,400.00
These are
These$ are the
the
Goods Available for Sale 4,050 100,350.00
oldest
oldest units
units in
in
Ending Inventory 1,400
inventory
inventory and
and are
are
Cost of Goods Sold 2,650
most
most likely
likelyto
to
remain
remain inin inventory
inventory
when
whenusing
usingLIFO.
LIFO.
8 - 33
 Last-In, First-Out
Perpetual Inventory System
Date Purchased Sold Balance
Beg. Inv. 1,200 x 22.00 = 26,400 $ 26,400.00
9/3 900 x 24.00 = 21,600 48,000.00
9/15 550 x 25.00 = 13,750 61,750.00
2,650 550 x 25.00 = 13,750.00
450 x 24.00 = 10,800.00
1,000 24,550.00 37,200.00

The Cost of Goods Sold for the September

15 sale is $24,550.
After this sale, there are 1,650 units in
inventory at various costs per unit.

8 - 34
 Last-In, First-Out
Perpetual Inventory System
Date Purchased Sold Balance
Beg. Inv. 1200 x 22.00 = 26,400 $ 26,400.00
9/3 450 x 24.00 = 10,800 37,200.00
9/21 600 x 27.00 = 16,200 53,400.00
9/22 600 x 27.00 = 16,200.00
100 x 24.00 = 2,400.00
700 18,600.00 34,800.00

The Cost of Goods Sold for the

September 15 sale is $18,600.
After this sale, there are 1,550 units in
inventory at various per unit cost.
8 - 35
 Last-In, First-Out
Perpetual Inventory System
Date Purchased Sold Balance
Beg. Inv 1,200 x 22.00 = 26,400 $ 26,400.00
9/3 350 x 24.00 = 8,400 34,800.00
9/29 800 x 28.00 = 22,400 57,200.00
9/30 800 x 28.00 = 22,400.00
150 x 24.00 = 3,600.00
950 26,000.00 31,200.00

The Cost of Goods Sold for the September

30 sale is $26,000.
After this sale, there are 1,400 units in
inventory (1,200 × $22.00) per unit
and (200 × $24.00) for a total cost of ending
inventory of $31,200.

8 - 36
 Last-In, First-Out
Periodic Inventory System
Picture This, LLC
Frame Inventory
Date Units $/Unit Total
Beg. Inventory 1,200 $ 22.00 $ 26,400.00
9/3 900 24.00 21,600.00
9/15 550 25.00 13,750.00
9/21 600 27.00 16,200.00
9/29 800 28.00 22,400.00
Goods Available for Sale 4,050 $ 100,350.00
Ending Inventory 1,400
Cost of Goods Sold 2,650

8 - 37
 Last-In, First-Out
Periodic Inventory System
Units Unit Cost Total Cost
Beginning inventory 1,200 $ 22.00 $ 26,400
Purchase of September 3 Picture This, LLC
200 24.00 4,800
Cost of goods available for sale Frame Inventory
1,400 31,200

Date Units $/Unit Total

Beg. Inventory 1,200 $ 22.00 $ 26,400.00
9/3 900 24.00 21,600.00
9/15 550 25.00 13,750.00
9/21 600 27.00 16,200.00
9/29 800 28.00 22,400.00
Goods Available for Sale 4,050 $ 100,350.00
Ending Inventory 1,400 31,200.00
Cost of Goods Sold 2,650 $ 69,150.00

8 - 38
 Last-In, First-Out
Perpetual Inventory System
Picture This, LLC
Frame Inventory
Date Units $/Unit Total
Beg. Inventory 1,200 $ 22.00 $ 26,400.00
9/3 900 24.00 21,600.00
9/15 550 25.00 13,750.00
9/21 600 27.00 16,200.00
9/29 800 28.00 22,400.00
Goods Available for Sale 4,050 $ 100,350.00
Ending Inventory 1,400 31,200.00
Cost of Goods Sold 2,650 $ 69,150.00

8 - 39
 When Prices Are Rising . . .
FIFO LIFO
• Matches low (older) • Matches high (newer)
costs with current costs with current
(higher) sales. (higher) sales.
• Inventory is valued at • Inventory is valued
approximate
replacement cost. based on low (older)
• Results in higher cost basis.
taxable income. • Results in lower
taxable income.

8 - 40
 U. S. GAAP vs. IFRS
LIFO is an important issue for U.S. multinational
companies. Unless the U.S. Congress repeals the LIFO
conformity rule, in inability to use LIFO under IFRS will
impose a serious impediment to convergence.

• LIFO is permitted and used by

• IAS No. 2, Inventories, does
U.S. Companies.
not permit the use of LIFO.
• If used for income tax
• Because of this restriction,
reporting, the company must
many U.S. companies use
use LIFO for financial
LIFO only for domestic
reporting.
inventories.
• Conformity with IAS No. 2
would cause many U.S.
companies to lose a valuable
tax shelter.
8 - 41
 Decision Makers’ Perspective

Factors Influencing Method Choice

How closely do
How well are costs
reported
matched against
costs reflect actual
related revenues?
flow of inventory?

How are income

taxes affected by
inventory method
choice?
8 - 42
 Inventory Management
The higher the ratio, the higher is
Gross profit
Gross profit ratio = the markup a company is able to
Net sales
achieve on its products.

Cost of goods sold

Inventory turnover ratio =
Average inventory

Designed to evaluate a company’s (Beginning inventory + Ending inventory

effectiveness in managing its 2
investment in inventory

8 - 43
 Quality of Earnings
Changes in the ratios we discussed above often provide information
about the quality of a company’s current period earnings. For example,
a slowing turnover ratio combined with higher than normal inventory
levels may indicate the potential for decreased production, obsolete
inventory, or a need to decrease prices to sell inventory (which will then
decrease gross profit ratios and net income).

Many believe that manipulating income reduces earnings quality

because it can mask permanent earnings. Inventory write-downs and
changes in inventory method are two additional inventory-related
techniques a company could use to manipulate earnings.

8 - 44
 Methods of Simplifying LIFO
LIFO Inventory Pools
The objectives of using LIFO inventory pools are to simplify
recordkeeping by grouping inventory units into pools based
on physical similarities of the individual units and to reduce
the risk of LIFO layer liquidation. For example, a glass
company might group its various grades of window glass
into a single window pool. Other pools might be auto glass
and sliding door glass. A lumber company might pool its
inventory into hardwood, framing lumber, paneling, and so
on. LIFO pools allow companies to account for a few
inventory pools rather than every specific type of inventory
separately.

8 - 45
 Methods of Simplifying LIFO
Dollar-Value LIFO (DVL)

DVL inventory pools are viewed as layers

of value, rather than layers of similar units.

DVL simplifies LIFO At the end of the

Example
record-keeping. period, we determine if
The replacement
a new inventory layer
inventory differs from
was added by
the old inventory on
DVL minimizes the comparing ending
hand. We just create a
probability of layer inventory to beginning
new layer.
liquidation. inventory.

8 - 46
 Methods of Simplifying LIFO
Dollar-Value LIFO (DVL)

We need to determine if the increase in

ending inventory over beginning inventory
was due to a price increase or an increase
in inventory.

1a. Compute a Cost index Cost in Cost in

Cost Index for the in layer = layer ÷ base
year year year
year.

8 - 47
 Methods of Simplifying LIFO
Dollar-Value LIFO (DVL)

1b. Deflate the

Ending
ending Ending
inventory Cost
inventory = inventory ÷
at base index
value using cost
year cost
the cost index.

1c. Compare
ending
inventory (at Ending Inv.
Change in Beg.
= at base –
base year inventory inventory
year cost
cost) to
beginning
inventory.
8 - 48
 Methods of Simplifying LIFO
Dollar-Value LIFO (DVL)

Next, identify the layers in ending

inventory and the years they were created.

Convert each layer’s

Sum all the layers to
base year cost to layer
arrive at Ending
year cost by
Inventory at DVL
multiplying times the
cost.
cost index.

8 - 49
 Methods of Simplifying LIFO
Dollar-Value LIFO (DVL)
Masterwear reports the following inventory
and general price information. Let’s look at the
solution to this example.
Inventory as
Ending Price base-year
12/31 inventory index prices
2011 $ 150,000 100% $ 150,000
2012 168,000 105% 160,000

8 - 50
 Methods of Simplifying LIFO
Dollar-Value LIFO (DVL)
Masterwear reports the following inventory
and general price information.
Inventory at
Ending Price base-year
12/31 inventory index prices
2011 $ 150,000 100% $ 150,000
2012 168,000 105% 160,000
168,000 ÷ 1.05 = 160,000

8 - 51
 Methods of Simplifying LIFO
Dollar-Value LIFO (DVL)
First, determine the LIFO layer for
the current year . . .
Inventory at
base-year Price Ending
December 31, prices index I\inventory
2011 $ 150,000 $ 150,000
2012 160,000
2012 LIFO Layer $ 10,000 105% 10,500
Inventory $ 160,500

8 - 52
 Methods of Simplifying LIFO
Dollar-Value LIFO (DVL)
At the LIFO layer at end of period prices to the
ending LIFO inventory from last period.
Inventory at
base-year Price Ending
December 31, prices index inventory
2011 $ 150,000 100% $ 150,000
2012 160,000
2012 LIFO Layer $ 10,000 105% 10,500
Inventory $ 160,500
10,000  1.05 = 10,500

8 - 53
 Supplemental LIFO Disclosures

Many companies use LIFO for external reporting and

income tax purposes but maintain internal records using
FIFO or average cost.

The conversion from FIFO or average cost

to LIFO takes place at the end of the
period. The conversion may look like this:

2011 2010
Total inventories at FIFO $ 15,429 $ 15,387
Less: LIFO allowance (1,508) (1,525)
Inventories, at LIFO cost $ 13,921 $ 13,862

8 - 54
 LIFO Liquidation

When prices rise . . .

LIFO inventory costs in the balance
sheet are “out of date” because they
reflect old purchase transactions.

If inventory declines, This LIFO

these “out of date” costs liquidation
may be charged to results in
current earnings. “paper profits.”

8 - 55
End of Chapter 8