Intermediate Accounting 14th Edition

Published by Wiley
ISBN 10: 0470587237
ISBN 13: 978-0-47058-723-2

Chapter 8 - Valuation of Inventories: A Cost-Basis Approach - Concepts for Analysis - Page 486: CA8-6a

Answer

Inventory profits apply to where inventory costs are less compared to the replacements of the inventory. Therefore, the net income is considered overstated while the cost of goods sold is considered understated.

Work Step by Step

In using the Last In First Out (LIFO) method, more recent costs are matched with recent revenues and inventory profits are thereby less.
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