FIFO and LIFO Part a. A company may compute inventory under one of various cost flow assumptions. Among these assumptions are first in, first out (FIFO) and last in, first out (LIFO). In the past, some companies have changed from FIFO to LIFO for computing portions or all of their inventory.
Required
1. Ignoring income tax, explain what effects a change from FIFO to LIFO has on a company’s net earnings and working capital.
2. Explain the difference between the FIFO assumption of earnings and operating cycle and the LIFO assumption of earnings and operating cycle. Part b. A company using LIFO inventory may establish a “Reserve for the Replacement of LIFO Inventory” account.
Required
Explain why and how a company establishes this “reserve” account and where it should show the account on its statement of financial position.