Whether or not a company uses the lower-of-cost-or-market method of valuing inventory is usually disclosed in a footnote to the financial statement.
The two bases of inventory pricing most widely used are cost and lower-of-cost-or-market.
The following principle requires a company to show in its financial statements by means of a footnote or other manner, the inventory costing method used:
An error in determining the cost of the ending inventory of a period generally results in misstated income for two periods.
During a period of rising prices, which inventory costing method might be expected to give the lowest valuation for inventory on the balance sheet?
When prices are rising, higher income will be reported using FIFO as compared with using LIFO.
If the ending inventory is overstated by $100, the net income will be:
During a period of falling prices, FIFO yields the greatest cost of goods sold.
In a period of constant prices, FIFO and LIFO will give identical results.
On January 1, 2007, Nichols Company’s inventory of Item X consisted of 2,000 units that cost $8 each. During 2007 the company purchased 5,000 units of Item X at $10, each, and it sold 4,500 units. Periodic inventory procedure is used. Cost of goods sold using LIFO is: