Question

The Wheat Company has used the LIFO method for inventory valuation since the start of business 15 years ago. The current year ending inventory is $375,000. If the FIFO method of inventory had been used, the inventory would be $450,000. If Wheat Company had used the FIFO inventory method, pre-tax income would have been:
A) $75,000 higher over the 15 year period
B) $75,000 lower over the 15 year period
C) $75,000 higherr in the current year
D) $75,000 lower in the current year

Answer 1

Answer:

A) $75,000 higher over the 15 year period

Explanation:

With the provided information, we assume the price rate of the material and inventory has been stagnant in respect of rate of increase in prices.

Thus, now we know as per LIFO goods which are bought latest are sold latest, that is closing inventory is the oldest inventory.

In FIFO method inventory bought first is sold first and accordingly, closing inventory is the latest bought goods.

Now for this if LIFO depicts closing inventory = $375,000

FIFO depicts closing inventory = $450,000

Which means there is a difference in first ever bought inventory 15 years back and current inventory of $75,000.

Thus, profit would have been higher in FIFO in all 15 years by $75,000.

Therefore, correct option is A)

$75,000 higher over the 15 year period