Dynamic Company, a telecommunications equipment company, has used the LIFO method adjusted for lower of cost or market for a number of years. Due to falling prices of its equipment, it has had to adjust (reduce) the cost of inventory to market each year for two years. The company is considering changing its method to FIFO adjusted for lower of cost or market in the future. Explain how the accounting conven- tions of consistency, full disclosure, and conservatism apply to this decision. If the change were made, why would management expect fewer adjustments to market in the future?
Periodic Inventory System and Inventory Costing Methods
Portia's Parts Shop recorded the following purchases and sales during the past year:
| Jan. |
1
|
Beginning inventory
|
125 cases @ $23
|
$ 2,875
|
|
Feb.
|
25
|
Purchase
|
100 cases @ $26
|
2,600
|
|
June
|
15
|
Purchase
|
200 cases @ $28
|
5,600
|
|
Oct.
|
15
|
Purchase
|
150 cases @ $28
|
4,200
|
|
Dec.
|
15
|
Purchase
|
100 cases @ $30
|
3,000
|
|
Goods available for sale
|
675
|
$18,275
|
|
Total sales
|
500 cases
|
|
|
Dec. 31 Ending inventory
|
175 cases
|
|
Assume that the company sold all of the June 15 purchase and 100 cases each from the January 1 beginning inventory, the October 15 purchase, and the December 15 purchase.
Determine the costs that should be assigned to ending inventory and cost of goods sold according to the periodic inventory method under each of the assumptions that follow. (Round to the nearest dollar and assume the periodic inventory system.)
1. Costs are assigned by the specific identification method.
2. Costs are assigned by the average-cost method.
3. Costs are assigned by the FIFO method.
4. Costs are assigned by the LIFO method.
5. What conclusions can be drawn about the effect of each method on the income statement and the balance sheet of Portia's Parts Shop?