LIFO vs. FIFO (matching and balance sheet impact / Impact on ROI)
A. Explain why "better matching" occurs with LIFO compared to FIFO?
B. What is the impact on the carrying value of inventory in the balance sheet when LIFO rather than FIFO is used during periods of inflation?
Company Evers uses FIFO inventory cost flow assumption. In a year of rising costs and prices, the firm reported net income of $1,920,000 and average assets of $12,000,000. If Evers had used the LIFO cost flow assumption in the same year, its cost of goods sold would have been $320,000 more than under FIFO, and its average assets would have been $320,000 less than under FIFO.
C. Calculate the firm's ROI under each cost flow assumption.
D. Suppose that two years later costs and prices were falling. Under FIFO, net income and average assets were $2,304,000 and $14,400,000, respectively. If LIFO had been used through the years, inventory values would have been $400,000 less than under FIFO, and current year cost of goods sold would have been $160,000 less than under FIFO. Calculate the firm''s ROI under each of these cost flow assumptions.