A company may compute inventory under one of various cost flow assumptions. Among these assumptions are first-in, first-out (FIFO) and last-in, first-out (LIFO). In the past, some companies have changed from FIFO to LIFO for computing portions or all of their inventory. Required: Ignoring income tax, explain what effects a change from FIFO to LIFO has on a company’s net earnings and working capital. Explain the difference between the FIFO assumption of earnings and operating cycle and the LIFO assumption of earnings and operating cycle.
A company may compute inventory under one of various cost flow assumptions. Among these assumptions are first-in, first-out (FIFO) and last-in, first-out (LIFO). In the past, some companies have changed from FIFO to LIFO for computing portions or all of their inventory. Required: Ignoring income tax, explain what effects a change from FIFO to LIFO has on a company’s net earnings and working capital. Explain the difference between the FIFO assumption of earnings and operating cycle and the LIFO assumption of earnings and operating cycle.
Financial Reporting, Financial Statement Analysis and Valuation
8th Edition
ISBN:9781285190907
Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Chapter9: Operating Activities
Section: Chapter Questions
Problem 9QE
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A company may compute inventory under one of various cost flow assumptions. Among these assumptions are first-in, first-out (FIFO) and last-in, first-out (LIFO). In the past, some companies have changed from FIFO to LIFO for computing portions or all of their inventory.
Required:
-
Ignoring income tax, explain what effects a change from FIFO to LIFO has on a company’s net earnings and
working capital .
-
Explain the difference between the FIFO assumption of earnings and operating cycle and the LIFO assumption of earnings and operating cycle.
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