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: CA8-7c

Answer

When we there is a rise in the price of inventory the application of the LIFO method results in a reduced net income figure since the method matches recent purchases against revenue. Moreover, the retained earnings will also be of a lower figure especially where there is inflation.

Work Step by Step

When the prices of goods and services rises the LIFO method will reflect a higher cost of goods sold, therefore reducing net income.
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