What do we assume about prices generally? Are they rising or declining
This is a very complex accounting process to calculate 🙂 but not so hard to understand. Don’t google this. Take a few minutes and think about this.Look at the big picture.
What do we assume about prices generally? Are they rising or declining? Well, this week, gas prices are certainly rising! Have you noticed?
So generally when we talk about inventory costing methods and the effects on taxable income, we are thinking of rising prices. LIFO stands for Last price in, First price out. Notice that the actual reality of the item sold is not relevant. Think of it as the accountant isin the back room without a window. He doesn’t know what is happening out in the warehouse. All he gets is a piece of paper telling him how many items/ units were sold. How does he determine the price?
It depends! It depends on which costing assumption/ method you are iusing.answerThank you for getting us started. This is a very complex accounting process to calculate 🙂 but not so hard to understand. What do we assume about prices generally? Are they rising or declining? Well, this week, gas prices are certainly rising! Have you noticed?
So generally when we talk about inventory costing methods and the effects on taxable income, we are thinking of rising prices. LIFO stands for Last price in, First price out. Notice that the actual reality of the item sold is not relevant. Think of it as the accountant is in the back room without a window. He doesn’t know what is happening out in the warehouse. All he gets is a piece of paper telling him how many items/ units were sold. How does he determine the price?
Fortunately he has a record of the prices for each of the purchases/ orders/ items. If he’s using LIFO he will use the most recent prices for item. He will need prices for each of the items sold. The prices for the most recent purchase, the Last item In, will be the prices he uses to record the cost of the good sold.
In times of rising prices, will the COGS using LIFO be higher or lower than using FIFO prices? What will be the effect of this on Net Income, on Net Taxable Income?
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Both LIFO and FIFO are used as inventory costing methods. When using LIFO, the price for the last item purchased is used to calculate the cost of goods sold. In contrast, FIFO involves removing the oldest items from inventory first and hence the price for the oldest item purchased is used to determine the cost of goods sold. It follows that since prices are generally rising using LIFO…………………………………….
APA
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