You are watching: In a period of inflation, which cost flow method produces the highest net income?
The network realizable worth is the amount supposed to be gathered from accounts receivable. That is the challenge value the receivables less an allowance for approximated uncollectible accounts.
Recognizing uncollectible accounts cost reduces accounts receivable on the legacy side and also reduces retained earnings on the equity side.
5-28: What are some advantages and disadvantages of the certain identification an approach of bookkeeping for inventory?
One benefit of the particular identification method is the both the perform account and also cost of goods sold reflect the actual amounts on hand and sold. This method is usually forced for high expense items such together automobiles, boats, etc. One disadvantage the this technique is that record maintaining can end up being burdensome for high-volume, lower-priced items.
FIFO allocates the expense of the first units purchased come the first units sold; consequently, in a period of rising prices, this would produce a higher net income. This may be an advantage for the objective of financial report if reporting a higher profit is desired. However, this is a disadvantage for taxes reporting due to the fact that a greater profit way paying much more tax. FIFO also tends to ideal match physical flow for most products.
LIFO allocates the expense of the last devices purchased to the an initial units sold; consequently, in a period of rising prices, this would produce a lower net income. This may be a disadvantage for the objective of financial report if reporting a greater profit is desired. However, for taxes reporting, a lower profit means paying less tax. LIFO likewise matches current cost with current revenues.
5-31: In an inflationary period, i m sorry inventory cost flow method will create the greatest net income? Explain.
In an inflationary period, i.e., a duration where prices are repeatedly rising, FIFO will produce the greatest amount of income. This is true because the items purchased very first (and in ~ the shortest cost) are the items that are deemed sold first whose expense is fee to expense. The highest expense items continue to be in the asset account inventory. Because the lowest cost items have actually been expensed, net revenue will be higher than it would certainly be suspect a LIFO flow.
5-32: In one inflationary period, which inventory expense flow an approach will develop the largest amount of complete assets top top the balance sheet? Explain.
In an inflationary period, FIFO will produce the biggest amount of complete assets. (Refer come the discussion for concern 31.) The unsold items, inventory, space the highest expense items. Consequently, assuming increasing prices, FIFO circulation produces a higher inventory amount than would be the instance under a LIFO flow.
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Flow of costs refers to the assumption that is produced the objective of identify the cost of inventory items that are sold once preparing gaue won statements. The price flow presumption that a business makes may have nothing to perform with the actual circulation of inventory into and out that the business. The physical circulation of items refers to the actual timing of when items are sold. For example, a grocery store store may use a FIFO cost flow presumption for financial statement purposes and this may reflect the physical circulation of part inventory items however not others. The grocer will placed the newer items in ~ the ago on the shelf and pull the oldest items come the front for the client to purchase (FIFO) but the customer might look because that the freshest item in ~ the earlier of the shelf (e.g. Milk) to purchase (LIFO).
5-35: assume that vital Co. Purchase 1.000 units of merchandise in its first year that operations because that $25 per unit. The company sold 850 devices for $40. What is the quantity of expenses of products sold using FIFO? LIFO? load average?