Continuing Case Solution
Chapter 8
(a)
Memorandum
To: Eric Conner and Phil Martin, CM2
From: L. Harbach
Re: Inventory Costing Methods
Date: January 11, 2013
Presented below are answers to the questions you posed at our last meeting.
There are four allowable cost flow assumptions when valuing inventory:
Specific identification traces the cost of the specific item sold and includes
The average-cost method measures the average cost of all similar goods
available during the period, and applies this amount to generate ending
inventory and cost of goods sold.
FIFO produces the lowest cost of goods value and the higher ending inventory
value in periods of rising prices when FIFO and LIFO results are compared. As a
result, in a period of rising prices, switching from LIFO to FIFO will yield a lower
Continuing Case Solution
(b)
Memorandum
To: Eric Conner and Phil Martin, CM2
From: L. Harbach
Re: Dangers of a LIFO Liquidation
Date: January 11, 2013
A LIFO liquidation tends to increase net income (assuming rising sales prices
(c)
Memorandum
To: Eric Conner and Phil Martin, CM2
From: L. Harbach
Re: Dollar-Value LIFO
Date: January 11, 2013
For most companies, dollar-value LIFO is a more practical method than
traditional LIFO, and its application minimizes LIFO liquidations. With dollar-value
LIFO, goods are measured in terms of the total dollar value in the inventory pool,