Intermediate Accounting (16th Edition)

Published by Wiley
ISBN 10: 1118743202
ISBN 13: 978-1-11874-320-1

Chapter 24 - Full Disclosure in Financial Reporting - Review and Practice - Questions - Page 1445: 18

Answer

The problem with using LIFO basis in interim financial reports is that inventory and cost of sales are reported at cost levels of the quarter, which can be significantly different from the overall price levels for the whole year. Thus LIFO base can distort the profitability of the company in a given quarter. For achieving more realistic financial reports, a purchase reserve account is set up to reflect higher amounts in costs of sales.

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