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LIFO
AND
FIFO
AND
THEIR
EFFECTS
ON
PROFITS
AND
CASH
FLOW
DURING
INFLATION
AND DEFLATION
By
Thomas
L.
Herzig
B.S.,
University
of
Wisconsin-Milwaukee,
1965
Presented
in
partial
fulfillment
of
the
requirements
for
the
degree
of
Master
of
Business
Administration
UNIVERSITY
OF
MONTANA
1976
ai
Deal
(2^^
4
79
7/
Date^^Z
7
UMI
Number:
EP36223
All rights
reserved
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TO
ALL
USERS
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of
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is
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and
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UMT
DteawttiionfHibteMng
UMI
EP36223
Published
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LLC
(2012).
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Dissertation
held
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TABLE
OF
CONTENTS
LIST
OF
TABLES
iii
Chapter
I.
INTRODUCTION
1
Purpose
Explanation:
LIFO
and
FIFO
History
Advantages
and
Disadvantages
II.
ANALYSIS
OF
PROBLEM
13
Research
Already
Done
Reason
For
This
Paper
What
This
Paper
Will
Examine
Limits
of
This
Study
III.
DESIGN
OF
THE
PROJECT
22
Structure
of
Problem
The
Assvmptions
Involved
Description
of
Model
IV.
DESCRIPTION
OF
RESULTS
32
Situation
A
Situation
B
Situation
C
Situations
D
and
E
V.
SUMMARY
AND
IMPLICATIONS
38
APPENDICES
41
SELECTED BIBLIOGRAPHY
74
ii
LIST
OF
TABLES
1.
An
Example
Using
LIFO
3
2.
An
Example
Using
FIFO
4
3.
Replenishment
Rates
20
4.
Input
Data
and
Replenishment
Rates
23
5.
LIFO
During
Inflation
29
6.
FIFO
During
Inflation
30
7.
Sxjmmary
of
Income
for
Situations
A
through
E.
.
.
.
33
iii
CHAPTER
I
INTRODUCTION
Many
methods
of
inventory
valuation
have
been
con-
ceived.
They
include
last
in,
first
out
(LIFO),
first
in,
first
out
(FIFO),
average
cost,
base-stock,
dollar-value
LIFO,
gross
profit,
next
in,
first
out
(NIFO),
specific
identification,
and
several
retail
methods.
Two
methods,
last
in,
first
out
(LIFO),
and
first
in,
first
out
(FIFO),
have
received
considerable
attention
recently
by
corporate
management
and
the
academic
community.
The
reason
for
this
attention
is
that
LIFO
and
FIFO
have
different
effects
on
the
profits
of
a
firm
during
inflation
and
deflation.
LIFO
and
FIFO
are
used
by
60
percent
of
the
622
companies
surveyed
by
The
American
Institute
of
Certified
Public
Accountants.
Recently
The
United
States
experienced
a
rapid
infla-
tion
in
many
sectors
of
the
economy.
This
inflation
was
then
followed
by
a
mild
deflation.
From
March
1973
to
March
1974,
the
price
index
of
industrial raw
materials,
as
reported
by
the
Bureau
of
Labor
Statistics,
went
from
151.2
to
238.5.^
Then
from
April
1974
to
December
1975
the
same
index
declined
^"Business
Week
Index,"
Business
Week,
April
7,
1973,
p.
2,
April
6,
1974,
p.
2,
and
January
12,
1976,
p.
2.
1
2
2
from
238,5
to 181.0.
On
an
average
per
quarter
basis
the
inflation
rate
was
14.44
percent
and
the
deflation
rate
was
4.54
percent.
This
inflation
followed
by
deflation
caused
many
managers
to
evaluate
which
inventory
method
they
should
use.
Purpose
The
purpose
of
this study
is
to
develop
a
model
that
management
can
use
in
determining
whether
to
switch
inventory
methods.
The
model
will
show
the
effects
on
profits
of
LIFO
and
FIFO
when
inflation
is
followed
by
deflation
under
dif-
ferent
rates
of
inventory
replenishment.
As
will
be
shown,
the
inventory
replenishment
rate
and
the
rates
of
inflation
and
deflation
affect
profits.
Before
the
model
is
developed
and
presented,
an
explanation
of
LIFO
and
FIFO
is
given.
This
is
then
followed
by
a
history
of
LIFO
and
FIFO,
their
advantages
and
disad-
vantages,
as
analysis
of
the
problem
to
be
studied,
the
design
of
the
project,
a
description
of
the
results,
and
finally
a
svramiary
and
implications.
Explanation:
LIFO
and
FIFO
LIFO
assvraies
that
the
first
costs
incurred
are
identi-
fied
with
inventory
and
the
last
or
most
recent
costs
are
assigned
to
cost
of
goods sold.
LIFO
values
inventory
by
^Ibid.
3
using
the
oldest
costs
incurred
and
will
not
reflect
the
current
value
of
inventory
when
prices
are
changing.
Cost
of
sales
are
valued
by
the
most
recent
costs,
and
this
results
in
a reasonably
accurate
matching
of
current
costs
with
revenue.
Income
then
is
fairly
accurately reported
when
LIFO
is
used.
Table
1
shows
the
use
of
LIFO.
TABLE
1
An
Example
Using
LIFO
Date
Purchase/Issue
Quantity
(Units)
Price
(dollars)
Balance
1
Jan
100
@
$10
3
Jan
Purchase
150
11
100
(a
10
150
@
11
7
Jan
Purchase
75
12
100
(a
10
150
@
11
75
@
12
12
Jan
Issue
75
50
12
11
100
(a
10
100
(a
11
Beginning
inventory
on
1
January
is
100
units
at
$10.
Then
on
3
January
purchases
of
150
units
at
$11
are
made.
Thus
the
balance
in
inventory
on
that
date
is
250
(100
units
at
$10
and
150
units
at
$11).
Then on
7
January
purchases
of
75
units
are
made.
This
made
the
balance
in
inventory
on
that
date,
325
units
(100
at
$10,
150
at
$11,
and
75
at
$12).
On
12
January
125
units
are
issued.
The
125
units
issued
include
75
at
$12
from
the
most
recent
4
purchase,
and
50
at
$11
from
the
next
most
recent
purchase.
Cost
of
sales
for
the
125
units
issued
on
12
January
is
$1,450
(75
X
$12
plus
50
x
$11).
Ending
inventory
is
$2,100
(100
X
$10
and
100
x
$11).
FIFO
assumes
that
costs
are
realized
in
the
order
in
which
they
occur.
The
first or
oldest
purchases
are
assigned
to
cost
of
sales,
and
the
latest
or
most
recent
purchases
are
assigned
to
inventory.
Cost
of
sales
are
valued
by
the
oldest
purchases,
and
when
prices
are
changing,
cost
of
sales
do
not
reflect
current
costs.
Inventory
is
valued
by
the
most
recent
costs
and
accurately reflects
current
costs.
Table
2
shows
the
use
of
FIFO.
TABLE
2
An
Example
Using
FIFO
Date
Purchase/Issue
Quantity
Price
(dollars)
Balance
1
Jan
100
(a
$10
3
Jan
Purchase
150
11
100
@
10
150
@
11
7
Jan
Purchase
75
12
100
@
10
150
(§
11
75
(a
12
12
Jan
Issue
100
25
10
11
125
(a
11
75
@
12
The
beginning
inventory
on
1
January
and
the
purchases
on
2
January
and
7
January along
with
the
inventory balances
on
those
dates
are
the
same
as
in
the
LIFO
example.
The
issue
5
on
12
January,
however,
is
handled
differently.
Since
the
oldest
items
are
issued
first
under
FIFO,
the
100
units
at
$10
and
25
of
the
150
units
at
$11
are
used.
Cost
of
sales
for
the
125
issued
on
12
January
is
$1,275
(100
units
x
$10
plus
25
units
x
$11).
Ending
inventory
is
$1,450
(125
units
X
$11
plus
75
units
x
$12).
These
examples
show
that
LIFO
and
FIFO
not
only
have
different
effects
on
the
value
inventory,
but
more
impor-
tantly
have
different
effects
on
cost
of
sales.
When
prices
are
rising,
as
is
the
case
in
these
examples,
LIFO
cost
of
sales
are
higher
($1,450)
than
FIFO
cost
of
sales
($1,275).
Income
under
LIFO
then
would
be
lower
than
income
under
FIFO.
Therefore
income
can
be
affected
by
the
inventory
valuation
method
used.
History
FIFO
has
always
been
an
acceptable
method
of
inventory
valuation
in
this
covintry.
One
reason
for
favoring
FIFO
is
its
consistency
with
soxmd
inventory
management.
Good
inven-
tory
practice
requires
the
oldest
goods
be
sold
first,
and
the
most
recently
purchased
goods
be
kept
in
inventory.
This
minimizes
losses
due
to
deterioration
and
obsolescence.
FIFO
reflects
this
ideal
movement
of
goods.
Another
reason
for
FIFO's
acceptance
is
that
the
balance
sheet
was
the
primary
financial
statement
in
our
early
history.
Pronouncements
by
the
American
Institute
of
Accountants
at
that
time
stressed
the
importance
of
the
accurate
valuation
of
items
on
this
6
3
statement.
Since
FIFO
accurately
reports
inventory,
its
use
was
acceptable
for
inventory
valuation.
FIFOs place
in
the
history
of
the
United
States
is
well
established,
but
by
the
1930*s
its
position
was
threat-
ened.
This
threat
resulted
from
the
increased
use
of
the
income
statement
as
the
primary
financial
statement.
The
increased
importance
of
this
statement
is
attributed
to
three
factors;
increased
internal
use
of
accounting
information,
absentee
ownership
of
corporations,
and
income
tax
laws.
When
businesses
were
small,
entrepreneurs had a
good
"feel"
for
how
well
their
businesses
were
doing.
They
did
not
require
income
data
to
evaluate
their
business.
With
the
growth
of
large
corporations,
managers
no
longer
could
get
an
intuitive
feel
for
their
operations.
They
needed
information
to
determine
how
well
different
products,
depart-
ments,
and
projects
were
doing.
This
required
income
orien-
ted
reporting.
Absentee
ownership
also
influenced
the
use
of
the
income
statement.
Stockholders
needed
information
to
eval-
uate
their
investments.
The
figure
most
often
considered
was
earnings
per
share,
and
accurate
income
data
was
necessary
to
make
this
a
meaningful
figure.
The
last
reason
for
the
increased
use
of
the
income statement
was
the
16th
Amendment
to
the
Constitution
which
imposed
a
tax
on
income.
This
O
Harry
Simons,
Intermediate
Accounting,
(Cincinnati:
South-Western
Publishing
Company,
1972)
,
p.
50.
7
amendment
was
passed
in
1913
and
since
that
time
taxes
on
income
have
become
increasingly
significant.
Although
LIFO
was
not
acceptable
in
the
United
States
prior
to
the
1930's,
it
was
common
in
Great
Britain
particu-
4
larly
with
textile
manufacturers
and
metal
fabricators.
Since
LIFO
provides
a
more
accurate
reporting
of
income,
pressure
grew
to
make
this
an
acceptable
method
of
inventory
evaluation
in
this
country.
Its
introduction
in
the
United
States
in
the
1930*s
was
not
well
received
since
the
Internal
Revenue
Service
(IRS)
did
not
consider
it
an
acceptable
method
for
valuing
inventories for
tax
purposes.
To
get
around
this
Congress
was
pressured
to
pass
the
Revenue
Act
of
1938.
The
Revenue
Act
of
1938
authorized
the
use
of
LIFO
when
reporting
income
for
tax
purposes,
for
ore
processors
of
basic
metals
and
for
certain
raw
materials
used
by
tanners.
This
limited
legislation
was
considered
discriminatory,
and
by
the
next
year
Congress
expanded
the
law
by
removing
res-
trictions
as
to
the
industries
and
classes
of
materials
to
which
LIFO
could
be
applied.^
This
expanded
legislation
was
also
restrictive
in
that
it
was
written
for industries
where
inventories
were
of
common
product
units
and
cbuld
be
easily
measured.
Thus,
this
expanded
legislation
was
not
readily
^George
E.
Youmans,
"A
Look
at
LIFO,"
Management
Accounting
56
(January
1975):
11.
^Sidney
Davidson,
ed.,
Handbook of
Modem
Accounting,
(New
York:
McGraw-Hill
Book
Company,
1975),
pp.
14-19,
and
H.
T.
McAnly,
"How
LIFO
Began,"
Managem:ent
Accoxmting
56
(May
1975):
24.
8
adapted
to
inventories
that
required
specific
identification.
That
is
for
inventories
where
each
unit
had
its
own
price.
To
acconmodate
firms
whose
inventory
required
speci-
fic
identification,
dollar-value
LIFO was
introduced
in
1941
to
overcome
this
objection,
and
the
use
of
dollar-value
LIFO
method
was
upheld
by
a
Tax
Court
in
1948.
Also
in
1948,
Treasury
Decision
5603
permitted
retailers
to
use
dollar-
value
LIFO,
and
by
1949
any
taxpayer
could
use
it.^
In spite
of
all
these
attempts
to
ease
the
use
of
LIFO
it
was
not
widely
adopted
as
recently
as
the
1950's.
In
fact
its
use
declined
from
the
mid
1950's
to
the
1960's.
The
American
Institute
of
Certifie'd
Public
Accountants
reported
that
in
1955
about
200
of
600
large
companies
used
LIFO,
but
during
the
1960's
and
early
1970's
the
number
of
companies
using
LIFO
declined
to
150.^
This
decline
did
not
last
long.
By
1973
the
number
increased
again.
An
accounting
firm
(Arthur
Young
6e
Co.)
study
shows
262
of
the
firms
listed
on
the
New
York
and
the
American
Stock
Exchanges
used
LIFO
by the
end
of
1973.
Nearly
20
percent
of
those
using
LIFO
changed
during
that
O
year.
Certainly
there
must
be
some
reason
for
LIFO's
limited
use
in
the
past
and
for
its
current
revival.
To
^cAnly,
"How
LIFO
Began,"
pp.
24-25,
^"Accounting,"
Business
Week,
August
31,
1974,
p.
26.
®"New
Set
of
Books,"
Wall
Street
Journal,
October
7,
1974,
p.
1,
10.
9
find
the
answers
one
must
look
at
the
features
and
advantages
and
disadvantages
of
both
methods.
Advantages
and
Disadvantages
LIFO
and
FIFO
have
different
effects
on
profits,
taxes,
and
ultimately
cash
flow.
For
FIFO
under
conditions
of
low
inventory
turnover
and rising
prices,
profits
are
inflated
due
to
inventory
profits.
Inventory
profits
result
from
a
higher
value
being
placed
on
ending
inventory
rather
than
the
same
quantity
of
physical
inventory
held
at
the
beginning
of
the
year.
LIFO,
under
the
same
circumstances
limits
inventory
profits
by
closely
matching
recent
costs
with
current
revenues.^®
Those
items
most
recently
purchased
are
included
in
the
cost
of
goods
sold figure
in
the
income
statement.
In
short,
during
an
inflationary
period
profits
are
lower
under
LIFO
than
FIFO
as
long
as
inventory
quantities
are
constant
or
increasing.
Higher
profits
result
in
higher
taxes
for
FIFO
when
prices
are
increasing,
and
this
is
espec-
ially
true
for
a
progressive
tax
structure.
The
ultimate
effect
is
an
increase
in
cash
out
flow,
since
higher
taxes
must
be
paid.
This
increased
cash
out
flow
for
taxes
makes
it
difficult
for
firms
to
meet
the
increased
costs
of
mater-
ials,
equipment,
capital,
and
labor
that
inevitably
occur
g
J.
Keith
Butters,
and
Powell
Niland,
Effects
of
Taxation
Inventory Accounting
and
Practices,
(Cambridge:The
Riverside
Press,
1949),
p.
27
^^Davidson,
Handbook
of
Modem
Accounting,
p.
14-19.
10
during
an
inflation.
LIFO,
however,
reflects
current
costs
to
the
extent
closing
inventory
equals or
exceeds
beginning
inventory.
More
accurately
as
long
as
inventory
stays
above
beginning
inventory
it
results
in
a
fairly
accurate
matching
of
costs
to
revenues.
However,
if
inventory
liquidation
occurs,
older
inventory
is
used,
and
higher
profits
are
reported
tander
LIFO.
During
periods
of
deflation
the
oppo-
site
would
result.
FIFO would
now
report
lower
earnings as
long
as
inventory
turnover
is
low
and
inventory
is
not
liqui-
dated.
LIFO
or
FIFO
may
be
an
advantage
or
disadvantage
depending
upon
what
objectives
are
considered
important
by
management
and
what
is
happening
to
prices
and
inventory
levels.
When
conserving
cash
is
important,
prices
are
rising,
and
inventory
is
constant
or
increasing,
LIFO
should
be
used.
When
profit
maximization
is
important
under
the
same
condi-
tions,
FIFO
should
be
used.
When
conserving
cash
is
impor-:
tant,
prices
are
declining,
and
inventory
is
constant
or
increasing,
FIFO
should
be
used.
When
profit
maximization
is
important
\mder
the
same
conditions,
LIFO
should
be
used.
When
inventories
are
liquidated
the
effects
of
LIFO
and
FIFO
on
profits
and
cash
flow
are
approximately
the
same.
There
are
other
things
to be
considered
when
eval-
uating
the
advantages
and
disadvantages
of
LIFO
and
FIFO.
Switching
from
one
method
to
the
other,
depending
upon
cir-
cxfflistances,
may
raise
or
lower
profits.
Existing
bonus
and
profit
sharing
plans
that
are
tied
to
profits
are
affected.
11
If
profits
are
increased,
the
firm
may
have
to
increase
its
outlay
for
these
programs.
On
the
other
hand if
profits
are
lowered,
people
who
have
become
accustomed
to
these
benefits
may
not
appreciate
the
change
in
inventory valuation.
Switching
from
one
method
to
the
other
can
also
affect
working
capital.
For
example,
changing
from
FIFO
to
LIFO
will
reduce the
value
of
inventory,
and
thus,
reduce
working
capital.
If
working
capital
is
impaired,
debt
covenants may
be
violated
and
lines
of credit
restricted
or
loans
called.
Also
penal-
ties
or
premiums
may
have
to
be
paid
because
of
working
capital
violations.
Government
regulations
should
be
considered
when
eval-
uating
a
switch
from
one
method
to
the
other.
Permission
is
not
required
from
the
Internal
Revenue
Service
when
switching
from
FIFO
to LIFO
as
long
as
annual
earnings
data
for
the
year
of
the
change
have
not
been
reported
or
disseminated.
However,
a
change
from
LIFO
to
FIFO
requires
permission
from
the
Treasury
Department.
The
application
must
be
made
within
the
first
180
days
of
the
fiscal
year
of
the
change.
There
are
many
factors
management
must
consider
when
deciding
which
method
of
inventory
valuation
is
best
for
them.
No
general
conclusion
can
be
made
as
to
which
one
is
best.
The
management
of
each
firm
must
weigh
the
advantages
and
^^James
B.
Edwards
and
Dean
F.
Graber,
"LIFO:
To
Switch
or
Not
to
Switch,"
Management
Accounting
57
(October
1975):
39.
12
disadvantages
of
each
method
and
determine
which
method
is
best
for
them.
Now
that
some
of
the
advantages
and
disadvantages
have
been
discussed,
an
analysis
of
the
specific
problem
to
be
studied
is
presented.
The
analysis
of
the
specific
problem
begins
with
the
research
already
accomplished.
CHAPTER
II
ANALYSIS
OF
PROBLEM
Research Already
Done
A
great
deal
of
research
has
been
done
on
LIFO
and
FIFO.
Much
of
the
work
has
concentrated
on
the
effects
LIFO
and
FIFO
have
on
profits,
and
most,
but
not
all,
has
been
accomplished
since
1971.
The
following
discussion
presents
selected
studies
done
on
the
subject.
Most
of
these
studies
consider
only
the
effects
on
profits.
Others
consider
cash
flow,
the
possibility
of
overstating
income,
the
impact
of
economic
circumstance,
the
effects
on
the
price
of
a
fimn's
stock,
the
relationships
of
price
level
adjustments
on
LIFO,
on
FIFO,
and
the
difference
between
LIFO
and
FIFO
and
a
model
of
certainty.
George
E.
Youmans,
budget
director
for West
Point
Pepperill,
Inc.,
in
an
article
"A
Look
At
Lifo,"
uses
the
case
method
for
showing
the
effects
on
cost
of
sales
and
ending
inventory
of
LIFO,
FIFO,
and
average
unit
cost
methods
12
during
a
period
of
inflation.
To
show
this,
Yoimians
devel-
ops
a
useful
but
simple
model
that
has
only
one
variable.
^^Youmans,
"A
Look
At
Lifo,"
p.
11.
13
14
cost
of
purchases
during
the
period.
He
increases
each
purchase
by
a
constant
dollar
amount,
and
then
arrives
at
the
conclusion
that
profits
are
less
and
cash
savings
greater
for
LIFO
than
FIFO.
James
B.
Edwards
and
Dean
F.
Graber
point
out
as
did
Yovnnans,
the
effects
of
LIFO
and
FIFO
on
income.
In
addi-
tion
they
consider
the
effects
of
LIFO
and
FIFO
on
assets,
13
and
how
profits
can
be
manipulated
under
LIFO.
They
show
through
an
example
that
under
LIFO,
the
value
of
ending
inventory
decreases,
but
the
decrease
in
inventory
can
be
more
than
offset
by
investing
the
cash
savings
from
reduced
income
taxes.
In
addition
they
show
how
profits
can
be
man-
ipulated
by
changing
inventory
levels.
If
profits
are
too
low
and
prices
are
rising,
a
firm
can
let
inventories
decline;
if
they
are
too
high,
they
can
increase
them.
Edwards
and
Graber
conclude
that
using
FIFO,
during
periods
of
inflation,
results
in
inventory
profits,
but
these
profits
are
not tot-
ally
available
to
replace
higher
costing
inventory
since
part
of
the
profits
go
to
income
taxes.
LIFO
corrects
this
problem
to
a
substantial
degree
except
when
the
firms
must
decrease
their
inventory.
It
can
then
result
in
significant
inventory
profits.
Ken
Milani
develops
the
effects
on
profits
and
inven-
tory
of
LIFO
and
FIFO
to
a
greater
degree
than
Youmans,
Edwards
^^Edwards
and
Graber,
"LIFO:
To
Switch
or
Not
to
Switch,"
pp.
35-40.
15
and
Graber.^^
He
not
only
shows
the
effects
on
profits
during
inflation
with
inventory
levels
constant
but
also
shows
separately
the
effects
on
profits
of
deflation
and
inventory
declines.
Using
models
he
shows
how
lower profits
and
lower
inventory
dollar
values
occur
using
LIFO
rather
than
FIFO
under
inflationary
conditions
when
inventory
levels
are
constant.
He
then
shows
using
models
that
when
deflation
occurs,
and
beginning
and
ending
inventory
levels
remain
constant,
profits
and
inventory
dollar
values
are
higher using
LIFO
than
FIFO. When
physical
inventory
levels
decline
after
an
inflation
and
replacement
cost
of
inventories
remains
the
same
as
the
previous
period
he
concludes
profits
are
higher
under
LIFO
than
FIFO,
but
inventory
dollar
values
are
less
for
LIFO.
Towles
and
Silex
consider
the
effects
of
dollar
value
LIFO
on
profits
under
inflation
and
deflation
with
inventory
volume
constant.They
also
consider
the
effects
on
profits
when
prices
rise
and
inventory
levels
either
increase or
decrease. Towles
and
Silex
maintain
that
the
prediction
of
future
costs
should
be
the
main
reason
for
switching
to
LIFO,
but
timing
is
also
important.
To
minimize
profits,
they
con-
clude
that
the
ideal
time
to
change
from
FIFO
to
dollar
value
^Slilani,
"LIFO
and
Its
Limitations,"
Management
Accounting
57
(December
1975):
31-32,
36.
^^Martin
F.
Towles
and
Karl
H.
Silex,
"Dollar-Value
LIFO
and
Effects
on
Profits,"
Management
Accounting
57
(July
1975):
27-29.
16
LIFO
is
when
prices
have
risen
significantly
during
the
fiscal
period,
are
expected
to
increase,
and
when
inventory
levels
will
remain
at
near
normal
levels.
Bestable
and
Merriwether
developed
simulation
models,
conceptually
similar
to
the
ones
used
in
this
study,
that
considered
the
potential
of
FIFO
to
overstate
income,
under
various
rates
of
inflation,
different
inventory
levels,
dif-
ferent
percentages
of
FIFO
cost
of
sales
to
sales,
and
differ-
ent
holding
period
durations.All
these,
they
concluded,
affect
the
magnitude
of
inventory
profits.
They
insist,
however,
inventory profits
would
not
even
exist
if
it
were
not
for
inflation.
Chasteen
studied
the
difference
in
economic
circxim-
stances
of
various
firms
to
determine
if
these
circimstances
had
any
impact
on
whether
they
used
FIFO,
average,
or
LIFO.^^
Economic
circtmistances
he
considered
were
the
ratio
of
inven-
tory
to
current
assets,
the
ratio
of
inventory
to
total
assets
(inventory
turnover)
the
ratio
of
raw
material
costs
to
total
product
costs,
and
the
rate
at
which
changes
in
raw
material
cost
results
in
changes
in
the
selling
price
of
the
end
pro-
duct.
He
concluded
that
there
were
no
significant
differences
W.
Bestable
and
Jacob
D.
Merriwether,
"FIFO
in
An
Inflationary
Environment,"
The
Journal
of
Accountancy
139
(March
1975):
49-55.
^^Lanny
C.
Chasteen,
"An
Empirical
Study
of
Differ-
ences
in
Economic
Circvunstances
as
a
Justification
for
Alter-
native
Inventory
Pricing
Methods,"
The
Accounting
Review
46
(July
1971):
504-508.
17
in
economic
cirexamstances
among
firms
that
use
LIFO,
average,
or
FIFO
for
inventory
valuation.
Sunder
investigated
the
effect
of
LIFO
and
FIFO
on
18
the
price
of
a
firm's
common
stock.
He
concluded
that
changes
in
market
price
of
a
company's
stock
is
due
to
changes
in
economic
value
rather
than
changes
in
reported
earnings.
Allan
R.
Drebin
in
an
article
"Price
Level
Adjust-
ments
and
Inventory
Flow
Assxmptions,"
points
out
that
many
inventory
valuation
methods
can
be
used,
but
LIFO,
FIFO,
and
19
average
methods
predominate.
Since
all
of
these
methods
can
be
used
and
each
has
different
effects
on
the
financial
statements,
comparability
among
companies,
and
between
years
is
difficult.
He
shows
that
if
statements
are
adjusted
to
reflect
changes
in
purchasing
power,
they
will
not
only
be
comparable
from
year
to
year,
but
also
allow
greater
compara-
bility
among
firms
using
different
inventory
valuation
methods.
Gambling
compares
the
effects
on
profits
of
LIFO
and
FIFO
with
those
produced
by
a
"model
of
complete
'cer
tainty'.
"20
This
model
equates
profits
with
the
internal
rate
of
return
required
to
reduce
all
the
cash
flows
to
the
present
value
of
1
fi
Shyam
Sunder,
"Stock
Price
and
Risk
Related
to
Accounting
Changes
in
Inventory
Valuation,"
The
Accounting
Review
50
(April
1975):
305-15.
19
Allan
R,
Drebin,
"Price
Level
Adjustments
and
Inventory
Flow
Assumptions,"
The
Accounting
Review
40
(January
1965):
154-62.
on
Trevor
E.
Gambling,
"LIFO
vs
FIFO
Under
Conditions
of
'Certainty',"
The
Accoimting
Review
43
(April
1968):
387-
89.
18
the
investments
of
a
firm.
He
concludes
that
over
the
life
of
the
firm
the
profits
for
all
three
methods
will
be
the
same,
but
for
each
method
the
cash
will
be
realized
at dif-
ferent
points
in
time.
Most
of
the
above
articles
describe
how
LIFO
and
FIFO
can
affect
profits
during
inflationary
and
deflationary
per-
iods.
In addition
two
of
the
articles
incorporate
the
effects
on
profits
of
changing
inventory
levels.
None
of
them,
how-
ever,
show
the
combined
results
of
an
inflationary
period
followed
by
a
deflationary
period
under
various
rates
of
inventory
replenishment.
The
latter
is
developed
in
this
paper.
Reason
For
This
Paper
The aspect
of
LIFO
and
FIFO
that
needs
attention
is
the
development
of
a
systematic
model
that
can
be
used
to
simulate
the
effects
on
profits
of
changing
from
FIFO
to
LIFO.
Firms
in
the
recent
past
needed
a
method
to evaluate
the
effects
on
profits
of
switching
from
FIFO
to
LIFO
during
an
inflation
where
resupplying
their
inventory
was
difficult
if
not
impossible.
Then
they
were
confronted
with
a
mild
defla-
tion
with
supplies
becoming
available
again.
These
variables,
prices
and
physical
inventory
changes,
can
affect
profits,
and
must
be
evaluated
when
considering
a
switch
from
one
method
to
the
other.
19
What
This
Paper
Will
Examine
Within the
past
three
years
this
country
experienced
a
rapid
inflation
with
attendant
shortages
followed,
in
some
sectors,
by
a
mild
deflation
with
increasing
supplies.
The
fact
that
some
sectors
of
the
economy
went
through
an
infla-
tion
and
then
a
deflation
was
established
in
the
introduction
to
this
paper.
A
specific
example
of
this
is
copper.
The
price
of
copper
increased
from
50.6
cents
to 86.6
cents
in
21
the
six
quarters
beginning
January,
1973
to
June
1974.
The
price
of
copper
increased
71.15
percent
in
those
six
quarters
or
an
average
of
11.86
percent
per
quarter. After
the
price
of
copper
increased
for
six
quarters,
it
then
declined
for
six
quarters.
From
July
1974
to
December 1975,
22
the
price
went
from
86.6
cents
to
63.8
cents.
This
is
a
decrease
of
35.74
percent
for
six
quarters
or
5.96
percent
per
quarter.
A
model
is
developed
to
show
the
effects
LIFO
and
FIFO
have
on
profits
when
an
inflation
is
followed
by
a
deflation
imder
various
inventory
replenishment
rates.
The
rates
of
inflation
and
deflation
and
the
duration
of
each
approximate
the
case
of
copper.
The
inflationary
rate
is
10
percent
and
lasts
for
six
quarters.
The
deflationary
rate
is
5
percent
and
also
lasts
for
six
quarters.
21
"Business
Week
Index,"
Business
Week,
January
6,
1973,
p.
2,
July
6,
1974,
p.
2,
January
12,
1976,
p.
2.
^^Ibid.
20
The
effects
LIFO
and
FIFO
have
on
profits
under
these
conditions
will
be
examined
under
five
different
inventory
replenishment
situations.
These
replenishment
rates
were
chosen
to
cover
a
broad
range
of
possibilities.
They
are
shown
in
Table
3.
TABLE
3
Replenishment
Rates
Situation
Inflation
Deflation
A
100%
100%
B
50%
150%
C
0%
200%
D
150%
100%
E
150%
50%
For
example,
in
sittiation
B,
50
percent
of
the
inventory
sold
during
each
quarter
of
inflation
is
replaced.
During
the
de-
flation
the
inventory
replenishment
rate
is
150
percent.
Limits
of
This
Study
In
examining
the
effects
of
FIFO
and
LIFO
only
two
factors,
inventory
costs
and
inventory
replacement
rates,
are
varied.
All
other
factors
are
held
constant.
Further,
only
the
effects
of
these
variables
on
profits
are
developed,
des-
cribed,
and
evaluated.
By
holding
all
other
factors constant,
the
effects
on
profits
of
LIFO
and
FIFO
under
the
conditions
specified
are
determined.
Other
factors
such
as
the
ninnber
21
of
end
items
sold,
the sales
price
of
end
items,
and
costs
other
than
inventory,
could
be
varied
and
in
reality
would.
But
for
the
purposes
of
this
paper
these
factors
are
kept
constant.
By
keeping
the
other
factors
constant
the
effects
on
profits
of
LIFO
and
FIFO
are
isolated,
and
this
makes
these
effects
easier
to
detennine.
In
reality
if
the
quan-
tity
sold
and
the
sales
price
were
increased,
profits
would
increase.
If
they
declined,
profits
would
decrease.
If
costs
other
than
inventory
increased,
profits
would
decrease.
If
they
decreased,
profits
would
increase.
CHAPTER
III
DESIGN OF
THE
PROJECT
Structure
of
Problem
A
model
is
developed
to
show how
LIFO
and
FIFO
effect
profits
when
an
inflation
is
followed
by
a
deflation
under
various
rates
of
inventory
replenishment.
The
rate
of
inflation
is
10
percent
and
the
rate
of
deflation
is
5
per-
cent.
The
duration
of
the
inflation
and
deflation
period
is
six
quarters
each.
These
rates
of
inflation
and
deflation
and
their
time
periods
approximate
the
situation
for
copper
from
January
1973
through
December
1975.
The
inventory
replenishment
rates
are
those presented
in
the
previous
chapter.
The
Asstmptions
Involved
Many
of
the
assumptions
have
already
been
discussed.
They
include
the
rates
of
inflation
and
deflation,
the
dura-
tion
of
inflation
and
deflation,
the
rate
of
inventory
replen-
ishment
and
the factors
held
constant
(the
sales
price,
vol-
xjme
of
sales,
and
other
costs).
Other
costs
are
held
constant
at
zero,
i.e.,
they
are
ignored.
The
starting
inventory
is
350
iinits
for
each
situation,
A
through
E.
The
starting
inventory
is
just
large
enough to
prevent
inventory
depletion.
22
23
Sales
are
fifty
vinits
per
quarter
at
twenty
dollars
per
linit.
Twenty
dollars
per
unit
is
an
arbitrary
amount
above
inven-
tory
cost
per
unit.
Description
of
Model
To
assist
in
understanding
the
model
to
be
used
in
this
study
a
flow
diagram
is
presented
in
Figure
1
to
show
how
the
model
works.
But
first
the
input
data
and
replen-
ishment
rates
are
summarized
in
Table
4.
TABLE
4
Input
Data
and
Replenishment
Rates
Input
Data
Beginning
Inventory
350
Units
Sales
per
quarter
50
Units
Sale
price
per
unit
20
dollars
Inflation
Rate
10
percent
Deflation
Rate
5
percent
Other
Costs
Inventory
Replenishment
Rate
Inflation
Deflation
Situation
A
100% 100%
Situation
B
507o
150%
Situation
C
0%
200%
Situation
D
150% 100%
Situation
E
1507o
507o
Calculate
Sales,
COS
Other
Costsi
i
Profit
/
Calculate
Sales,
COS
Other
CostSy
.
Profit
/
Ciunulate:
Total
Profits
Deflation
Inflation
Beginning
Inventory
'Calculate:
'
Sales,
COS
Other
Costs
V
Profit
>
Calculate:>
Sales,
COS
Other
CostSi
I
Profit
/
Cumulate:
Total
Profits
Inflation
Deflation
Fig.
1.
Flow
Diagram
of
Model
25
The
flow
diagram
of
the
model
(Figure
1)
begins
at
the
left
and
moves
toward
the
right.
For
each
situation
beginning
inventory
is
350
units
and
sales
are
50
xanits
per
quarter
at
a
constant
sales
price
of
20
dollars
per
unit.
Situation A
will
be
used
to
illustrate.
Starting
with
beginning
inventory
of
350
units
the
model
splits.
The
top
half
shows
what
happens
using
LIFO
and
the
bottom
half
shows
what
happens
using
FIFO.
After
going
through
six
quarters
of
10
percent
inflation
where
100
percent
of
the
inventory
used
is
replaced,
sales,
cost
of
sales
(COS),
other
costs,
and
profits,
are
calculated,
for
both
LIFO
and
FIFO.
Then
after
these
six
periods
of
inflation
the
resulting
inventory
data
is
used
as
input
data
for
six
periods
of
five
percent
deflation,
again,
with
100
percent
replacement
of
inventory.
Then
at
the
end
of
the
deflationary
periods
sales,
cost
of
sales,
other
costs,
and
profits,
are
calculated
using
LIFO
and
FIFO.
Finally,
the
ctmulative
effect
of
the
inflation-
ary
and
deflationary
periods
on
profits
are calculated.
The
same
is
done
for
the
rest
of
the
situations
using
their
respective
replacement
rates.
The
model
can
be
expressed mathematically
with
equa-
tions
.
These
equations
show
how
the
difference
in
profits,
sales,
and
cost
of
sales
(COS),
and
cost
of
additions
to
inventory
are
determined.
The
difference
in
profits
between
LIFO
and
FIFO
can
be
expressed
with
the
following
equation.
26
(1)
AP
=
-
Pp
where:
AP
=
difference
in
profits
LIFO
vs
FIFO;
Pj^
=
profits
using
LIFO;
Pp
=
profits
using
FIFO.
To
determine
Pj^
and
Pj,
the
following
equations
are
used:
(2)
Pl
=
S
-
COSj^
-
OC
(3)
Pj.
=
S
-
COSj^
-
OC
where:
S
=
sales;
COST
=
cost
of
sales
using
LIFO;
COSp
=
cost
of
sales
using
FIFO;
OC
=
other costs.
Sales
(S)
are
determined
using
the
following
equation:
(4)
S
=
EQP
where;
Q
=
quantity
sold
in
each
period;
P
=
price
of
each
unit
sold
The
cost
of
sales
for
LIFO
and
FIFO
are
calculated
by
using
the
following
equations:
(5)
COSj_
-
e(Q.
27
(6)
COSj.
=
^(Q
•
...
^)
where:
Q
=
quantity
sold
in
each
period;
r
n
.••.1
=
cost
of
each
unit
sold
in
each
period
using
the
last
item
pur-
chased,
C
,
first
then
the
next
n
CT
=
cost
of
each
unit
sold
in
each
period
using
the
first
item
pur-
chased,
C^,
then
the next
C^.
The
cost
of
the
vinits
purchased
in
a
period,
C^,
is
determined
by
using
the
following
equation.
(7)
*
(1+i)
where:
C
=
cost
of
the
items
purchased
in
the
previous
period;
i
=
rate
of
inflation
or
deflation.
Equation
one,
aP
=
-
Pp,
can
be
expressed
as
follows:
(8)
A
P
=
CSQ.P
-
E
(Q.
-
OC]
[E.Q.P
-
e(Q.
-
OC]
An
example
using
the
above
equation
and
situation
A
during
inflation
is
presented
in
Table
5.
28
Sales
(EQP)
is
easy
to
determine
in
this
example
since
50
imits
at
$20
per
unit are
sold
each
of
the
six
quarters.
Total
sales
are
$6,000.00
(6
periods
x
50
units
x
$20).
Cost
of
sales
is
determined
by
using
the
equations
COSj^
=
•••
1^'
^
^i
•
*-n^
cost
of
additions
to
inventory
for
each
period
is
determined
by
using the
equation
=
^n-1
*
•
Cost
increases
from
$10.00
per
unit
for
beginning
inventory
to
$17.71
for
addi-
tions
to
inventory
in
period
six.
Tables
5
and
6
show
the
results
of
applying
the
above
three
equations.
Cost
of
sales
for
LIFO
is
$3,857.50.
This
is
deter-
mined
by
stmmiing
the
cost
of
the
last
50
items
purchased
for
each
period.
In
this
case
the
last
50
are
the
50
added
to
inventory
during
each
period.
29
TABLE
5
LIFO
During
Inflation
Situation
A
LIFO;
(10%
Inflation)
100%
Replacement
Quantity
Purchase
Cost
of
Sales
Purchase
Price
(Qty
x
Price)
Inventory
350
50
$10.00
11.00
50
@
$10.00
=
$
500.00
300
@
$
50
@
10.00
11.00
50
$12.10
50
@
$11.00
=
$
550.00
300
@
$
50
@
10.00
12.10
50
$13.31
50
@
$12.10
=
$
605.00
300
0
$
50
0
10.00
13.31
50
$14.64
50
@
$13.31
=
$
665.50
300
0
$
50
0
10.00
14.64
50
$16.10
50
@
$14.64
ss
$
732.00
300
0
$
50
0
10.00
16.10
50
$17.71
50
@
$16.10
as
$
805.00
300
0
$
50
0
10.00
17.71
Total
Cost
of
Sales
$3,857.50
Ending
Inventory
$3,885.50
Cost
of
sales
for
FIFO
is
$3,000.00
(Table
6).
This
is
determined
by
stmrming
the
50
oldest
items
in
inventory
for
each
period.
In
this
case
they
all
came
from
beginning
inven-
tory.
30
TABLE
6
FIFO During
Inflation
Situation
A
FIFO:
(10%
Inflation)
100%
Replacement
Quantity
Purchase
Cost
of
Sales
Purchase
Price
(Qty
X
Price)
Inventory
350
$10.00
50
@
$10.00
=
$
500.00
300
@
$
10.00
50
11.00
50
@
$
11.00
50
$12.10
50
0
$10.00
$
500.00
250
@
$
10.00
50
@
11.00
50
@
12.10
50
$13.31
50
@
$10.00
=
$
500.00
200
@
$
10.00
50
@
11.00
50
@
12.10
50
@
13.31
50
$14.64
50
@
$10.00
=
$
500.00
150
0
$
10.00
50
0
11.00
50
0
12.10
50
0
13.31
50
0
14.64
50
$16.10
50
@
$10.00
=
$
500.00
100
0
$
10.00
50
0
11.00
50
0
12.10
50
0
13.31
50
0
14.64
50
0
16.10
50
$17.71
50
@
$10.00
+
$
500.00
50
0
$
10.00
50
0
11.00
50
0
12.10
50
0
13.31
50
0
14.64
50
0
16.10
50
0
17.71
Total
Cost
of
Sales
$3,000.00
Ending
Inventory
$4,
743.00
31
The
difference
in
profit
between
LIFO
and
FIFO
is
calculated
assxjming
other
costs
are
zero.
Equation
8
is
used
to
calculate
difference
in
profits.
From
equation
8:
AP
=
CzQ.P
-
i:(Q.
_
3^)
-
OC]
-
[EQ.P
-
J:(Q.
...
-
OC]
AP
=
($6,000.00
- $4,243.00)
-
($6,000.00
-
$3,000.00)
AP
=
$1,757.00
-
$3,000.00
AP
=
$1,243.00
Profits
are
$1,243.00
lower
using
LIFO
than
FIFO.
Management
could
apply
the
above
model
to
the
situa-
tion
in
their
firm.
They
would
have
to
input
their
own
sales
price,
nxmiber
of
units
sold,
beginning
inventory,
inventory
replacement
rates,
inflation
and
deflation
rates,
and
dura-
tion
of
inflation
and
deflation.
Inputting
their
data
into
the
model
will
show
the
effects
LIFO
and
FIFO
have
on
profits.
Management
then
would
choose
the
method
that
best
satisfied
their
objective
(maximizing
profits
or
conserving
cash).
CHAPTER
IV
DESCRIPTION
OF
RESULTS
The
detailed
calculations
to
arrive
at
the
income
for
each
situation
are
included
in
the
Appendices.
Appendix
A
shows
the
calculations
for
profits,
and
Appendices
B
through
F
shows
the
calculations
for
cost
of
sales.
Profits
are
sum-
marized
for
each
situation
in
Table
7.
A
description
of
each
situation
and
relationships
between
models
is
presented
next.
The
significant
point
that
will
soon
become
apparent
is
the
difference
between
profits
for
LIFO
and
FIFO
narrow
and
even
reverse
as
inventory
is
liquidated
and
then
built
up
again.
Situation
A
Situation
A,
where
inventory
replacement
is
100
per-
cent,
shows
the
typical
expectations
of
the
effects
of
LIFO
and
FIFO
on profits.
During
the
inflationary
periods profits
are
lower
for
LIFO
than
FIFO, $1,757.00
versus
$3,000.00
for
a
spread
of
$1,243.00.
The
spread
between
LIFO
and
FIFO
profits
is
used
to
compare
the
different
situations.
Lower
profits
for
LIFO results
from
the
latest
purchases
being
used
to
determine
cost
of
sales.
Since
prices
are
rising,
cost
of
sales
increase and
therefore
profits
are
lower.
FIFO
during
inflation
reports
higher
profits for
the
opposite
32
33
reason.
The
earliest
purchases
are
used
to
determine
cost
of
sales,
and
since
these
are
lower,
profits
will
be
higher.
TABLE
7
Summary
of
Income
for
Situations
A
through
E
Inflation
Deflation
Cumulative
Difference
Situation
A
LIFO
FIFO
$1,757.
3,000.
00
00
$1,544.
2,142.
50
50
$3,301.50
5,142.50
$1,841.
00
Situation
B
LIFO
FIFO
$2,378.
3,000.
50
00
$1,544.
1,717.
50
25
$3,923.00
4,717.25
$
794.
25
Situation
C
LIFO
FIFO
$3,000.
3,000.
00
00
$1,544.
1,461.
50
00
$4,544.50
4,461.00
$
83.
50
Situation
D
LIFO
FIFO
$1,757.
3,000.
00
00
$1,544.
2,403.
50
25
$3,301.50
5,403.25
$2
,101.
75
Situation
E
LIFO
FIFO
$1,757.
3,000.
00
00
$1,650.
2,403.
75
25
$3,407.75
5,403.25
$1,995.
50
The
effects
on
profits
during
the
deflationary
period
are
$1,544.50
for
LIFO
and
$2,142.50
for
FIFO
for
a
spread
of
$598.00.
Normally,
during
a
deflation,
profits
are
higher
34
for
LIFO
than
FIFO,
but
in
this
case
that
is
not
true.
The
reason
for
this
is that
FIFO
has
exhausted all
but
the
last
50
units
of
the
original
inventory
and
is
just
beginning
to
use
the
lower
priced inventory
bought
while
prices
were
rising.
LIFOi
however,
is
using
the
higher
priced
inventory
bought
while
prices
were
declining.
Even
though
prices
are
decreas-
ing
they
are
not
decreasing
fast
enough
to
compensate
for
the
lower
valued
inventory used
by
FIFO. The
cxanulative
effects
of
both
inflationary
and
deflationary
periods show
overall
profits
lower
for
LIFO
than
FIFO,
$3,301.50
versus
$5,142.50,
a
spread
of
$1,841.00.
Situation
B
In Situation
B
where
replacement
during
inflation
is
50
percent
and
during
deflation
150
percent
the
difference
in
profits
between
LIFO
and
FIFO
for
inflationary
periods
and
deflationary
periods
are
less
than
in
Situation
A.
Income
during
the
inflationary
period
is
$2,378.50
for
LIFO
and
$3,000.00
for
FIFO,
a
spread
of
$621.50.
The
spread
during
this
time
period
for
Situation
A
was
$1,243.00.
Dur-
ing
the
deflationary
periods
LIFO
income
was
$1,544.50
and
FIFO
$1,717.25,
a
spread
of
$172.75.
For
Situation
A
during
this period
the
spread
was
$598.00.
The
cvmiulative
effects
of
both
inflationary
and
deflationary
periods
is
$3,923.00
for
LIFO
and
$4,717.25
for
FIFO
for
a
total
spread
of
$794.25.
This
compares
with
cumulative
spread
in
Situation
A
of
$1,841.
From
the
above
it
can
be
seen
that
the
difference
in
35
the
amount
of
profits
for
LIFO
and
FIFO
diminish
when
inven-
tory
is
contracting.
The
reason
is
that
under
LIFO
more
of
the
low
priced
inventory
is
used
during
inflationary
periods
in
Situation
B
than
Situation
A
thus,
decreasing
cost
of
sales
and
increasing
income.
The same
is
true
during
defla-
tion
but
to
a
lesser
extent.
For
FIFO
there
is
no
differ-
ence
in
income
between
A
and
B
during
inflation
since
both
use
the
same inventory,
beginning
inventory.
During
the
deflationary
period,
cost
of
sales
rises
faster
for
FIFO
since
the
use
of
high
priced inventory
rises
faster.
This
is
due
to
the
lower
level
of
replacement
of
inventory
during
the
inflationary
period
in
this
situation than
in
A.
Situation
C
For
Situation
C
where
replacement
is
zero
during
inflation
and
200
percent during
deflation
the
results
are
even
more
pronotmced,
in
fact,
a
reversal
occurs.
Income
for
LIFO
and
FIFO
during
inflation
is
identical,
$3,000.00
for
each.
This
is
because
LIFO
and
FIFO
use
the
same
inven-
tory,
i.e.,
beginning
inventory
has
not
been
depleted.
Income
during
deflation
using
LIFO
is
$1,544.50
and
using
FIFO
is
only
$1,461.00
a
spread
of
$83.50,
now
in
favor
of
FIFO.
Once
the
inflation
is
over,
deflation
sets
in,
and
replacement
of
inventory
begins,
higher
profits
will
be
real-
ized
for
LIFO
than
FIFO.
The
reason
for
this
is
LIFO
during
deflation
uses
the
latest
cost
which
is
the
lowest
when
cal-
culating
cost
of
sales.
FIFO
now
is
using
the
earliest
cost.
36
which
is
always
the
highest
except
for
the
first period
when
the
last
portion
of
beginning
inventory
is
used.
Situations
D
and
E
Situations
D
and
E
represent
the
situation
where
inventories
are
being
built
up during
inflation.
The
rate
of
inventory
build
up
is
150
percent
for
both
Situations.
Inventory
replacement
rates
during
the
deflation
are
100
percent
for
D
and
50
percent
for
C.
The
results
for
LIFO
and
FIFO
during
inflation
are
the
same
as
in
Situation
A,
and
this
makes
sense.
For
LIFO
the
latest
purchase
will
apply
and
since
they are
greater
than
in
Situation
A,
one
would
expect
the
results
to
be
the
same.
FIFO,
too,
will
be
the
same
since
beginning
inventory
has
not
been
depleted.
Situation
D
and
E
have
approximately
the
same
results
during
the
deflationary
period.
For
Situation
D,
LIFO
income
is
$1,544.50
and
FIFO
income
is
$2,403.24
for
a
spread
of
$858.75,
For
Situation
E,
LIFO
income
is
$1,650.75
and
FIFO
income
is
$2,403.25 for
a
spread
of
$752.50.
LIFO
income
in
Situation
E
is
slightly
higher
than
in
A
and
D,
because
inven-
tory
is
being
built
up
at
a
lower
rate
(50
percent)
in
Situa-
tion
E.
Therefore,
more
of
the
inventory
going
to
cost
of
sales
is
at
a
lower
price.
Of
all
five
situations
FIFO
income
is
highest
in
D
and
E.
This
is
because
inventory
was
built
up
at
the
highest
rate
(150
percent)
during
the
inflation.
During
this
time
prices
are
lowest.
The
overall
pattern
that
emerges
after
rtmning
the
37
model
for
all
five
situations
is
that
LIFO
reports
lower
profits
for
inflation
and
deflation
in
every
case
except
in
situation
C.
In
the
latter
situation
profits
are
the
same
for
LIFO
and
FIFO
during
the
inflation.
During
the
defla-
tion
in
that
situation,
FIFO
reports
lower
profits
than
LIFO.
This
is
the
only
time
FIFO
shows
a
lower
net
income
than
LIFO.
CHAPTER
V
SUMMARY
AND
IMPLICATIONS
The
recent
inflation
and
subsequent
deflation
caused
many
managers
to
evaluate
their
inventory
valuation
method
(LIFO
or
FIFO)
.
LIFO
assumes
that
the
most
recent
items
pur-
chased
are
assigned
to
cost
of
sales.
FIFO
assumes
the
earl-
iest
items
purchased
are
assigned
to
cost
of sales.
FIFO has
traditionally
been
an
acceptable method
of
inventory
valuation
for
two
reasons.
One,
it
is
consistent
with
sound
inventory
management
and
another
it
accurately
values
inventory
on the
balance
sheet.
The
need
for
LIFO
increased
as
the
income
statement,
absentee
ownership,
and
income
taxes
became
more
important.
LIFO's
eventual
accept-
ance
as
a
method
of
valuing
inventory
resulted
because
it
accurately
reports
cost
of
sales
on
the
income
statement.
The
advantages
and
disadvantages
of
LIFO
and
FIFO
largely
depend
upon
one's
point
of
view.
What
is
important,
maximizing
profits
or conserving
cash?
Switching
from
one
method
to
the
other
can
also
affect
profit
sharing
plans,
and
working
capital.
All
these
factors
must
be
considered.
A
great
deal
of
research
has
been
done
on
LIFO
and
FIFO,
however,
one
area
still
needed
to
be
addressed.
That
38
39
was
the
effects
on
profits
of
LIFO
and
FIFO
when
an
infla-
tion
is
followed
by
a
deflation
under
various
rates
of
inven-
tory
replacement.
More
important
a
model
was
needed
by
management
to
help
evaluate
which
method
is
best
for
them.
A
model
was
developed,
and
this
model
was
used
to
show
the
effects
of
LIFO
and
FIFO
on
profits
under
conditions
of
changing
prices
and
changing
inventory
levels.
The
results
of
applying
the
model
to
Situations
A
through
E
are
that
LIFO
reports
lower
profits
than
FIFO
in
all
cases
except
Situa-
tion
C.
The
faster
inventories
are
depleted
during
the
infla-
tion
and
the
faster they
are
built
up
during
the
deflation
the
less
difference
there
is
in
reported
profits
between
LIFO
and
FIFO.
The difference
in
profits
progressively
narrows
in
Situations
A,
B,
and C.
In
Situation
C
profits
are
slightly
higher
for
FIFO
than
LIFO.
This
is
the
only
case
where
FIFO
profits
are
higher
than
LIFO
profits.
In
Situa-
tions
D
and
E
where
inventories
are
built
up
during
the
infla-
tion
and
then
held
constant
or
decreased
during
the
deflation,
t
LIFO
reports
lower
profits
than
FIFO.
The
difference
in
profit
levels
in
Situations
D
and
E
are
approximately
the
same.
The
fact
that
LIFO
reports
lower
earnings
than
FIFO
during
the
deflation
in
Situations
A,
B,
D,
and
E
is
contrary
to
what
is
generally
expected.
FIFO
normally
reports
lower
earnings
during
a
deflation. This
implies
that
when
an
inflation
is
followed
by
a
deflation
a
firm
can
expect
LIFO
40
to
report
lower profits
than
FIFO
except
when
inventories
are
not
replaced
during
the
deflationary
periods.
In
that
case FIFO
will
report
higher
profits
than
LIFO.
To
determine
the
difference
in
profits
between
LIFO
and
FIFO
firms
should
apply
the
model
to
reflect
their
situation.
They
should
estimate
the
different
factors
that
are
required
by
the
model,
run
the
model
using
their
inputs,
and
determine
the
difference
in
profits
using
LIFO
and
FIFO.
The
difference
in
the
expected
profits
should
then
be
compared,
and
balanced
against
the
other
factors
that
influence
the
choice
between
LIFO
and
FIFO.
The
other
aspects
that
must
be
considered
are
the
effects
on
profit
sharing
plans,
working
capital,
and
government
regulations.
Only
after
considering
all
factors
can
a
final
decision
be
made.
Appendix
A
42
SITUATION
A
Inflation
LIFO
FIFO
Sales
$6,000.00
$6,000.00
Cost
of
Sales
4,243.00
3,000.00
Profit
$1,757.00
$3,000.00
Deflation
LIFO
FIFO
Sales
$6,000.00
$6,000.00
Cost
of
Sales
4,455.50
3,857.50
Profit
$1,544.50
$2,142.50
Cumulative
Profit
$3,301.50
$5,152.50
SITUATION
B
Sales
Cost
of
Sales
Profit
Sales
Cost
of
Sales
Profit
Cumulative
Profit
Inflation
FIFO
$6,000.00
3,000.00
LIFO
$6,000.00
3,621.50
$2,378.50
$3,000.00
Deflation
LIFO
$6,000.00
4,455.50
$1,544.50
$3,923.00
FIFO
$6,000.00
4,282.75
$1,717.25
$4,717.25
43
SITUATION
C
Sales
Cost
of
Sales
Profit
Sales
Cost
of
Sales
Profit
Cumulative
Profit
Inflation
FIFO
LIFO
$6,000.00
3,000.00
$3,000.00
$3,000.00
Deflation
$6,000.00
3,000.00
LIFO
$6,000.00
4,455.50
$1,544.50
$4,544.50
FIFO
$6,000.00
4,539.00
$1,461.00
$4,461.00
SITUATION
D
Sales
Cost
of
Sales
Profit
Sales
Cost
of
Sales
Profit
Cumulative
Profit
Inflation
FIFO
$6,000.00
3,000.00
LIFO
$6,000.00
4,243.00
$1,757.00
$3,000.00
Deflation
LIFO
$6,000.00
4,455.50
$1,544.50
$3,302.00
FIFO
$6,000.00
3,596.75
$2,403.25
$5,403.25
44
SITUATION
E
Inflation
Sales
Cost
of
Sales
Profit
Sales
Cost
of
Sales
Profit
Ctjmulative
Profit
LIFO
FIFO
$6,000.00 $6,000.00
4,243.00
3,000.00
$1,757.00 $3,000.00
Deflation
LIFO
$6,000.00
4,349.25
$1,650.75
$3,407.75
FIFO
$6,000.00
3,596.75
$2,403.25
$5,403.25
Appendix
B
46
SITUATION
A
LIFO:
(10%
Inflation)
100%
Replacement
Quantity
Purchase
Purchase
Price
Cost
of
Sales
(Qty
X
Price)
Inventory
350
50
$10.00
11.00
50
$11.00
=
$
550.
00
350
@
$
10.00
50
$12.10
50
$12.10
=
$
605.
00
350
0
$
10.00
50
$13.31
50
0
$13.31
=
$
665.
50
350
@
$
10.00
50
$14.64
50
$14.64
=
$
732.
00
350
0 $
10.00
50
$16.10
50
@
$16-10
=
$
805.
00
350
0
$
10.00
50
$17.71
50
(?
$17.71
=
$
885.
50
350
0
$
10.00
Total
Cost
of
Sales
$4
,243.
00
Ending
Inventory
$3,500.00
A7
SITUATION
A
LIFO:
(5%
Deflation)
100%
Replacement
Quantity
Purchase
Purchase
Price
Cost
of
Sales
(Qty
X
Price)
Inventory
50
$16.82
50
$16.82
=
$
841.00
350
@
$
10.00
50
$15.98
50
$15.98
=
$
799.00
350
@
$
10.00
50
$15.18
50
$15.18
=
$
759.00
350
@
$
10.00
50
$14.42
50
$14.42
=
$
721.00
350
0
$
10.00
50
$13.70
50
@
$13.70
=
$
685.00
350
0
$
10.00
50
$13.01
50
0
$13.01
=
$
650.50
350
0
$
10.00
Total
Cost
of
Sales
Ending
Inventory
$4,455.50
$3,500.00
48
SITUATION
A
FIFO:
(10%
Inflation)
100%
Replacement
Quantity
Purchase
Cost
of
Sales
Purchase
Price
(Qty
X
Price)
Inventory
350
$10.00
50
@
$10.00
=
$
500.00
300
@
$
10.00
50
11.00
50
0
11.00
50
$12.10
50
@
$10.00
=
$
500.00
250
$
10.00
50
@
11.00
50
@
12.10
50
$13.31
50
@
$10.00
=
$
500.00
200
$
10.00
50
11.00
50
@
12.10
50
13.31
50
$14.64
50
@
$10.00
=
$
500.00
150
@
$
10.00
50
11.00
50
12.10
50
0
13.31
50
@
14.64
50
$16.10
50
@
$10.00
=
$
500.00
100
@
$
10.00
50
(?
11.00
50
@
12.10
50
@
13.31
50
@
14.64
50
0
16.10
50
$17.71
50
@
$10.00
=
$
500.00
50
@
$
10.00
50
0
11.00
50
0
12.10
50
0
13.31
50
0
14.64
50
0
16.10
50
0
17.71
Total
Cost
of
Sales
Ending
Inventory
$3,000.00
$4,743.00
49
SITUATION
A
FIFO:
(5%
Deflation)
100%
Replacement
Quantity
Purchase
Cost
of
Sales
Purchase
Price
(Qty
X
Price)
Inventory
50
$16.82
50
@
$10.00
=
$
500.00
50
@
$
11.00
50
0
12.10
50
0
13.31
50
0
14.64
50
0
16.10
50
0
17.71
50
@
16.82
50
$15.98
50
@
$11.00
=
$
550.00
50
0
12.10
50
0
13.31
50
0
14.64
50
0
16.10
50
0
17.71
50
0
16.82
50
0
15.98
50
$15.18
50
0
$12.10
=
$
605.00
50
0
13.31
50
0
14.64
50
0
16.10
50
0
17.71
50
0
16.82
50
0
15.98
50
0
15.18
50
$14.42
50
@
$13.31
=
$
665.50
50
0
14.64
50
0
16.10
50
0
17.71
50
0
16.82
50
0
15.98
50
0
15.18
50
0
14.42
50
$13.70
50
@
$14.64
=
$
732.00
50
0
16.10
50
0
17.71
50
0
16.82
50
0
15.98
50
0
15.18
50
@
14.42
50
@
13.70
50
SITUATION
A
FIFO;
(5%
Deflation)
100%
Replacement
(Continued)
Quantity
Purchase
Purchase
Price
Cost
of
Sales
(Qty
X
Price)
Inventory
50
$13.01
50
0
$16.10
=
$
805.00
50
@
$
17.71
50
@
16.82
50
@
15.98
50
@
15.18
50
@
14.42
50
@
13.70
50
0
13.01
Total
Cost
of
Sales
Ending
Inventory
$3,857.50
$4,656.00
Appendix
C
52
SITUATION
B
LIFO:
(10%
Inflation)
50%
Replacement
Quantity
Purchase
Cost
of
Sales
Purchase
Price
(Qty
X
Price)
Inventory
350
$10.00
25
$10.
00
25
11.00
25
11.
00
=
$
525.
.00
325
(3
$
10,
.00
25
$12.10
25
$12.
10
25
@
10.
00
=
$
552.
.50
300
$
10.
.00
25
$13.31
25
$13.
31
25
@
10.
00
-
$
582.
.75
275
$
10.
,00
25
$14.64
25
$14.
64
25
10.
00
=
$
616.
,00
250
@
$
10.
00
25
$16.10
25
$16.
10
25
10.
00
=
$
652.
50
225
$
10.
00
25
$17.71
25
@
$17.
71
25
(?
10.
00
=
$
692.
75
200
$
10.
00
Total
Cost
of
Sales
Ending
Inventory
$3,621.50
$2,000.00
53
SITUATION
B
LIFO:
(5%
Deflation) 150%
Replacement
Quantity
Purchase
Cost
of
Sales
Purchase
Price
(Qty
X
Price)
Inventory
75
$16.82
50
@
$16.82
=
$
841.00
200
@
$
10.00
25
@
16.82
75
$15.98
50
@
$15.98
=
$
799.00
200
@
$
10.00
25
0
16.82
25
@
15.98
75
$15.18
50
@
$15.18
=
$
759.00
200
@
$
10.00
25
@
16.82
25
@
15.98
25
@
15.18
75
$14.42
50
@
$14.42
=
$
721.00
200
@
$
10.00
25
@
16.82
25
@
15.98
25
@
15.18
25
@
14.42
75
$13.70
50
@
$13.70
=
$
685.00
200
@
$
10.00
25
@
16.82
25
@
15.98
25
@
15.18
25
@
14.42
25
@
13.70
75
$13.01
50
@
$13.01
=
$
650.50
200
@
$
10.00
25
@
16.82
25
0
15.98
25
0
15.18
25
0
14.42
25
0
13.70
25
0
13.01
Total
Cost
of
Sales
$4,455.50
Ending
Inventory
$4 ,227.75
54
SITUATION
B
FIFO:
(10%
Inflation)
50%
Replacement
Quantity
Purchase
Cost
of
Sales
Purchase
Price
(Qty
X
Price)
Inventory
350
$10.00
50
@
$10.00
=
$
500.00
300
@
$
10.00
25
11.00
25
(?
11.00
25
$12.10
50
@
$10.00
=
$
500.00
250
@
$
10.00
25
0
11.00
25
12.10
25
$13.31
50
@
$10.00
»
$
500.00
200
$
10.00
25
11.00
25
12.10
25
13.31
25
$14.64
50
@
$10.00
=
$
500.00
150
@
$
10.00
25
11.00
25
12.10
25
@
13.31
25
14.64
25
$16.10
50
$10.00
=
$
500.00
100
@
$
10.00
25
11.00
25
@
12.10
25
13.31
25
@
14.64
25
@
16.10
25
$17.71
50
0
$10.00
=
$
500.00
50
@
$
10.00
25
@
11.00
25
@
12.10
25
@
13.31
25
@
14.64
25
@
16.10
25
@
17.71
Total
Cost
of
Sales
Ending
Inventory
$3,000.00
$2,621.50
55
SITUATION
B
FIFO;
(5%
Deflation)
150%
Replacement
Quantity
Purchase
Cost
of
Sales
Purchase
Price
(Qty
X
Price)
Inventory
75
$16.82
50
0
$10.00
=
$
500.00
25
0
$
11.00
25
0
12.10
25
@
13.31
25
0
14.64
25
0
16.10
25
0
17.71
75
0
16.82
75
$15.98
25
$11.00
=
$
577.50
25
0
$
13.31
25
12.10
25
0
14.64
25
0
16.10
25
0
17.71
75
0
16.82
75
0
15.98
75
$15.18
25
0
$13.31
=
$
698.75
25
0
$
16.10
25
0
14.64
25
0
17.71
75
0
16.82
75
0
15.98
75
0
15.18
75
$14.42
25
0
$16.10
=
$
845.25
75
0
$
16.82
25
0
17.71
75
0
15.98
75
0
15.18
75
0
14.42
75
$13.70
50
0
$16.82
=
$
841.00
25
0
$
16.82
75
0
15.98
75
0
15.18
75
0
14.42
75
0
13.70
75
$13.01
25
0
$16.82
=
$
820.00
50
0
$
15.98
25
0
15.98
75
0
15.18
75
0
14.42
75
0
13.70
75
0
13.01
Total
Cost
of
Sales
Ending
Inventory
$4,282.75
$5,022.25
Appendix
D
57
SITUATION
C
LIFO:
(10%
Inflation)
0%
Replacement
Quantity
Purchase
Purchase
Price
Cost
of
Sales
(Qty
X
Price)
Inventory
350
$10.00
50
@
$10.00
=
$
500.00
300
@
$
10.00
50
@
$10.00
=
$
500.00
250
@
$
10.00
50
$10.00
=
$
500.00
200
0 $
10.00
50
$10.00
=
$
500.00
150
0
$
10.00
50
0
$10.00
=
$
500.00
100
0
$
10.00
50
@
$10.00
=
$
500.00
50
@
$
10.00
Total
Cost
of
Sales
Ending
Inventory
$3,000.00
$
500.00
58
SITUATION
C
LIFO;
(5%
Deflation)
200%
Replacement
Quantity
Purchase
Cost
of
Sales
Purchase
Price
(Qty
X
Price)
Inventory
100
$16.82
50
@
$16.82
-
$
841.
00
50
@
$
10.00
100
$15.98
50
@
$15.98
=
$
799.
00
50
@
$
10.00
50
@
16.82
50
@
15.98
100
$15.18
50
@
$15.18
=
$
759.
00
50
@
$
10.00
50
0
16.82
50
0
15.98
50
0
15.18
100
$14.42
50
@
$14.42
=
$
721.
00
50
@
$
10.00
50
0
16.82
50
0
15.98
50
0
15.18
.
50
0
14.42
100
$13.70
50
@
$13.70
=
$
685.
00
50
0
$
10.00
50
0
16.82
50
0
15.98
50
0
15.18
50
0
14.42
50
0
13.70
100
$13.01
50
0
$13.01
=
$
650.
50
50
0 $
10.00
50
0
16.82
50
0
15.98
50
0
15.18
50
0
14.42
50
@
13.70
50
0
13.01
Total
Cost
of
Sales
Ending
Inventory
$4,455.50
$4,955.50
59
SITUATION
C
FIFO:
(10%
Inflation)
0%
Replacement
Quantity
Purchase
Purchase
Price
Cost
of
Sales
(Qty
X
Price)
Inventory
350
$10.00
50
@
$10.00
=
$
500.
00
300
@
$
10.
00
50
@
$10.00
=
$
500.
00
250
@
$
10.
00
50
Q
$10.00
»
$
500.
00
200
0
$
10.
00
50
0
$10.00
=
$
500.
00
150
@
$
10.
00
50
@
$10.00
=
$
500.
00
100
@
$
10.
00
50
@
$10.00
=
$
500.00
50
@
$
10.00
Total
Cost
of
Sales
Ending
Inventory
$3,000.00
$
500.00
60
SITUATION
C
FIFO;
(5%
Deflation)
200%
Replacement
Quantity
Purchase
Purchase
Price
Cost
of
Sales
(Qty
X
Price)
Inventory
100
$16.82
50
@
$10.00
=
$
500.
00
100
@
$
16.82
100
$15.98
50
@
$16.82
=
$
841.
00
50
@
$
100
0
16.82
15.98
100
$15.18
50
@
$16.82
=
$
841.
00
100
0
$
100
0
15.98
15.18
100
$14.42
50
@
$14.98
=
$
799.
00
50
0
$
100
0
100
0
15.98
15.18
14.42
100
$13.70
50
@
$15.98
=
$
799.
00
100
0
$
100
0
100
0
15.18
14.42
13.70
100
$13.01
50
@
$15.18
=
$
759.
00
50
0
$
100
0
100
0
100
0
15.18
14.42
13.70
13.01
Total
Cost
of
Sales
Ending
Inventory
$4,539.00
$4,872.00
Appendix
E
62
SITUATION
D
LIFO:
(10%
Inflation)
150%
Replacement
Qiiantity
Purchase
Cost
of
Sales
Purchase
Price
(Qty
X
Price)
Inventory
350
$10.00
50
@
$11.00
=
$
550.00
350
(?
$
10.00
75
11.00
25
11.00
75
$12.10
50
@
$12.10
=
$
605.00
350
@
$
10.00
25
0
11.00
25
@
12.10
75
$13.31
50
@
$13.31
=
$
665.50
350
$
10.00
25
11.00
25
0
12.10
25
0
13.31
75
$14.64
50
@
$14.64
=
$
732.00
350
0
$
10.00
25
0
11.00
25
0
12.10
25
0
13.31
25
0
14.64
75
$16.10
50
@
$16.10
«
$
805.00
350
0
$
10.00
25
0
11.00
25
0
12.10
25
0
13.31
25
0
14.64
25
0
16.10
75
$17.71
50
@
$17.71
=
$
885.00
350
0
$
10.00
25
0
11.00
25
0
12.10
25
0
13.31
25
0
14.64
25
0
16.10
25
0
17.71
Total
Cost
of
Sales
Ending
Inventory
$4,243.00
$5,621.50
63
SITUATION
D
LIFO:
(5%
Deflation)
100%
Replacement
Quantity
Purchase
Cost
of
Sales
Purchase
Price
(Qty
X
Price)
Inventory
50
$16.82
50
@
$16.82
=
$
841.00
350
@
$
10.00
•
25
@
11.00
25
@
12.10
25
@
13.31
25
@
14.64
25
@
16.10
25
@
17.71
50
$15.98
50
@
$15.98
=
$
799.00
350
@
$
10.00
25
@
11.00
25
@
12.10
25
0
13.31
25
@
14.64
25
@
16.10
25
@
17.71
50
$15.18
50
@
$15.18
=
$
759.00
350
@
$
10.00
25
@
11.00
25
@
12.10
25
0
13.31
25
@
14.64
25
@
16.10
25
@
17.71
50
$14.42
50
@
$14.42
=
$
721.00
350
0
$
10.00
25
0
11.00
25
0
12.10
25
0
13.31
25
0
14.64
25
0
16.10
25
0
17.71
50
$13.70
50
@
$13.70
=
$
685.00
350
0
$
10.00
25
0
11.00
25
0
12.10
25
0
13.31
25
0
14.64
25
@
16.10
25
@
17.71
64
SITUATION
D
LIFO:
(5%
Deflation)
100%
Replacement
(Continued)
Quantity
Purchase
Cost
of
Sales
Purchase
Price
(Qty
X
Price)
Inventory
50
$13.01
50
(?
$13.01
=
$
650.00
350
@
$
10.00
25
@
11.00
25
@
12.10
25
@
13.31
25
@
14.64
25
@
16.10
25
@
17.71
Total
Cost
of
Sales
$4,455.50
Ending
Inventory
$5
,621.50
65
SITUATION
D
FIFO
(10%
Inflation)
150%
Replacement
Quantity
Purchase
Cost
of
Sales
Purchase
Price
(Qty
X
Price)
Inventory
350
$10.00
50
@
$10.00
=
$
500.00
300
@
$
10.00
75
11.00
75
@
11.00
75
$12.10
50
@
$10.00
=
$
500.00
250
@
$
10.00
75
@
11.00
75
$13.31
50
@
$10.00
=
$
500.00
200
@
$
10.00
75
0
11.00
75
0
12.10
75
0
13.31
75
$14.64
50
0
$10.00
=
$
500.00
150
0
$
10.00
75
0
11.00
75
0
12.10
75
0
13.31
75
0
14.64
75
$16.10
50
@
$10.00
=
$
500.00
100
0
$
10.00
75
0
11.00
75
0
12.10
75
0
13.31
75
0
14.64
75
0
16.10
75
$17.71
50
@
$10.00
=
$
500.00
50
0
$
10.00
75
0
11.00
75
0
12.10
75
0
13.31
75
0
14.64
75
0
16.10
75
0
17.71
Total
Cost
of
Sales
$3,000.00
Ending
Inventory
$6,864.50
66
SITUATION
D
FIFO
(5%
Deflation)
100%
Replacement
Quantity
Purchase
Cost
of Sales
Purchase Price
(Qty
X
Price)
Inventory
50
$16.82
50
@
$10.00
-
$
500.
00
75
0
$
11.00
75
(?
12.10
75
@
13.31
75
@
14.64
75
@
16.10
75
@
17.71
50
@
16.82
50
$15.98
50
@
$11.00
=
$
550.
00
25
0
$
11.00
75
@
12.10
75
0
13.31
75
0
14.64
75
0
16.10
75
0
17.71
50
0
16.82
50
0
15.98
50
$15.18
25
@
$12.10
=
$
577.
50 50
0
$
12.10
75
0
13.31
75
0
14.64
75
0
16.10
75
0
17.71
50
0
16.82
50
0
15.98
50
0
15.18
50
$14.42
50
@
$12.10
=
$
605.
00
75
0
$
13.31
75
0
14.64
75
0
16.10
75
0
17.71
50
0
16.82
50
@
15.98
50
@
15.18
50
@
14.42
67
SITUATION
D
FIFO
(5%
Deflation)
100%
Replacement
(Continued)
Quantity
Purchase
Cost
of
Sales
Purchase
Price
(Qty
X
Price)
Inventoiry
50
$13.70
50
@
$13.31
=
$
665.50
25
@
$
13.31
75
14.64
75
16.10
75
@
17.71
50
@
16.82
50
0
15.98
50
0
15.18
50
0
14.42
50
@
13.70
50
$13.01
25
@
$14.64
-
$
698.75
50
0
$
14.64
75
0
16.10
75
0
17.71
50
0
16.82
50
0
15.98
50
0
15.18
50
0
14.42
50
0
13.70
50
0
13.01
Total
Cost
of
Sales
$3,596.75
Ending
Inventory
$6,991.25
Appendix
F
69
SITUATION
E
LIFO;
(10%
Inflation)
150%
Replacement
Quantity
Purchase
Cost
of
Sales
Purchase
Price
(Qty
X
Price)
Inventory
350
$10.00
50
0
$11.00
=
$
550.00
350
0
$
10.00
75
11.00
25
0
11.00
75
$12.10
50
0
$12.10
=
$
605.00
350
0
$
10.00
25
0
11.00
25
0
12.10
75
$13.31
50
0
$13.31
=
$
666.50
350
0
$
10.00
25
0
11.00
25
0
12.10
25
0
13.31
75
$14.64
50
0
$14.64
=
$
732.00
350
0
$
10.00
25
0
11.00
25
0
12.10
25
0
13.31
25
0
14.64
75
$16.10
50
0
$16.10
=
$
805.00
350
0
$
10.00
25
0
11.00
25
0
12.10
25
0
13.31
25
0
14.64
25
0
16.10
75
$17.71
50
0
$17.71
=
$
885.50
350
0
$
10.00
25
0
11.00
25
0
12.10
25
0
13.31
25
0
14.64
25
@
16.10
25
0
17.71
Total
Cost
of
Sales
Ending
Inventory
$4,243.00
$5,621.50
70
SITUATION
E
LIFO;
(5%
Deflation)
50%
Replacement
Quantity
Purchase
Cost
of
Sales
Purchase
Price
(Qty
x
Price)
Inventoiry
25
$16.82
25
@
$17.71
=
350
@
$
10.00
25
@
16.82
=
$
863.25
25
0
11.00
25
@
12.10
25
@
13.31
25
0
14.64
25
0
16.10
25
$15.98
25
@
$15.98
=
350
0
$
10.00
25
0
16.10
=
$
802.00
25
0
11.00
25
0
12.10
25
0
13.31
25
0
14.64
25
$15.18
25
0
$15.18
=
350
0
$
10.00
25
0
14.64
-
$
745.50
25
0
11.00
25
0
12.10
25
0
13.31
25
$14.42
25
0
$14.42
=
350
0
$
10.00
25
0
13.31
=
$
693.25
25
0
11.00
25
0
12.10
25
$13.70
25
0
$13.70
=
350
0
$
10.00
25
0
12.10
=
$
645.00
25
0
11.00
25
$13.01
25
0
$13.01
=
350
0
$
10.00
25
0
11.00
=
$
600.25
Total
Cost
of
Sales
Ending
Inventory
$4,349.25
$3,500.00
71
SITUATION
E
FIFO:
(10%
Inflation)
150%
Replacement
Quantity
Purchase
Cost
of
Sales
Purchase
Price
(Qty
x
Price)
Inventory
350
$10.00
50
@
$10.00
=
$
500.00
300
@
$
10.00
75
11.00
75
@
11.00
75
$12.10
50
@
$10.00
=
$
500.00
250
@
$
10.00
75
0
11.00
75
@
12.10
75
$13.31
50
@
$10.00
=
$
500.00
200
@
$
10.00
75
@
11.00
75
@
12.10
75
0
13.31
75
$14.64
50
@
$10.00
=
$
500.00
150
0
$
10.00
75
0
11.00
75
0
12.10
75
0
13.31
75
0
14.64
75
$16.10
50
@
$10.00
=
$
500.00
100
0
$
10.00
75
0
11.00
75
0
12.10
75
0
13.31
75
0
14.64
75
0
16.10
75
$17.71
50
@
$10.00
=
$
500.00
50
@
$
10.00
75
@
11.00
75
@
12.10
75
@
13.31
75
@
14.64
75
@
16.10
75
0
17.71
Total
Cost
of
Sales
Ending
Inventory
$3,000.00
$6,864.50
73
SITUATION
E
FIFO:
(5%
Deflation)
50%
Replacement
Quantity
Purchase
Cost
of
Sales
Purchase
Price
(Qty
X
Price)
Inventory
25
$13.70
50.0
$13.31
=
$
665.50
25
@
$
13.31
75
@
14.64
75
@
16.10
75
17.71
25
16.82
25
15;
98
25
@
15.18
25
@
14.42
25
@
13.70
25
$13.01
25
@
$13.31
=
50
@
$
14.64
25
@
14.64
=
$
698.75
75
16.10
75
@
17.71
25
16.82
25
15.98
25
0
15.18
25
0
14.42
25
0
13.70
25
0
13.31
Total
Cost
of
Sales
Ending
Inventory
$3,596.75
$5,170.25
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