____ Using the LIFO cost assumption will always result in a lower net income than using the FIFO cost assumption. Barnes & Noble, for example, reports that its gross margin was 30.9 percent in 2008 and 30.4 percent in 2007. That is certainly one piece of information to be included in a detailed investigation of this company. At the end of the year, on December 31, a physical inventory is taken that finds that four bathtubs, Model WET-5, are in stock (4 – 3 + 3 – 3 + 3 – 2 + 2).

Companies that apply LIFO often hope decision makers will convert their numbers to FIFO for comparison purposes. Footnote disclosure of FIFO figures can be included to make this conversion possible. In addition, analysts frequently determine several computed amounts and ratios to help illuminate what is happening inside a company. The gross profit percentage simply determines the average amount of markup on each sale. It demonstrates pricing policies and fluctuations often indicate policy changes or problems in the market. The average number of days in inventory and the inventory turnover both help decision makers know the length of time a company takes to sell its merchandise.

Calculate ending inventory and cost of goods sold under both a periodic and a perpetual FIFO system. Second, income tax laws enable the government to help regulate the health of the economy. Simply by raising or lowering tax rates, the government can take money out of the economy or leave money in the economy . As an illustration, recently a significant tax break was passed by Congress for first-time home buyers.

In each of these assumptions, a different cost is moved from inventory to cost of goods sold to reflect the sale of merchandise. The reported inventory balance as well as the expense on the income statement are dependent on the cost flow assumption that is selected. In periods of inflation, FIFO reports a higher net income than LIFO and a larger inventory balance. Consequently, LIFO is popular because it is often used to reduce income tax costs. U.S. GAAP tends to apply standard reporting rules for many transactions to make financial statements more usable by decision makers.

In Chapter 4 “How Does an Organization Accumulate and Organize the Information Necessary to Create Financial Statements?”, Heather Miller started her own business, Sew Cool. The financial statements for December were presented in Chapter 7 “In Financial Reporting, when does aegislash learn king’s shield What Information Is Conveyed about Receivables?” and are shown again below. For convenience, assume the business was started on January 1, 20X8 with no assets. The Quiqqley Company is started in Year One and buys 400 pieces of inventory for $4 each on June 1.

Here, because the first shirt cost $50, the following entry is made to record the expense and reduce the inventory. For large organizations, such transactions can take place thousands of times each day. This standard amount is always reclassified into expense to reflect the sale. Companies that use this method are not making an assumption because they know which item was sold.