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Explain to Julia what inventory profits as and how LIFO method could
reduce
In LIFO method, newer inventory is sold first and older remains in inventory. LIFO method lower profits, because LIFO method leads to high cost of goods sold and low ending inventory compared to FIFO method. This is because inflation, prices of newer goods higher than the older goods. Here, low ending inventory increase the cost of goods sold and this increased cost of goods sold reduces sales amount resulting to low profit. Example: Suppose a business firm has opening inventory about 1000 units at $5 and in August 1, 2012 it purchased 2000 units at $6 and in August 7, 2012 it purchased 3000 units at $8. The business firm sold 4000 units at $10 in August 10, 2012. So according to LIFO method in perpetual system:
So in LIFO method cost of goods sold is $30,000 and ending inventory is $11,000 and it sold $40,000. So in LIFO method the gross profit is about 10,000. According to FIFO method: Cost of goods sold 1. 10005 = 2. 20006 = 3. 10008 = Total = 5000 12000 8000 $25,000 Total = $16000 Ending Inventory 1. 20008 = 16000
So in FIFO method cost of goods sold is $25,000 and ending inventory is $16,000 and it has a gross profit of $16,000. So LIFO reduces both inventory and profit.
The end