"Financial Report":LIFO
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Questions 1:
One reason that the last-in, first-out (LIFO) inventory valuation method is widely used in the United States is most likely that it:
A、 results in higher reported gross profit.
B、 is available under both US GAAP and International Financial Reporting Standards.
C、 results in higher operating cash flows.
Questions 2:
Depreciation expense under which of the following methods is least likely affected by the estimate of the useful life of the asset?
A 、Double declining balance method
B 、Straight-line method
C、 Units-of-production method
C is correct. LIFO is widely used in the United States because it results in a higher cost of goods sold, and thus lower taxable profits, under the assumption of historically rising prices. Income taxes are correspondingly lower, and thus operating cash flows are higher.
A is incorrect. Under normal conditions (rising prices), the LIFO method results in a higher reported cost of goods sold and a lower reported gross profit.
B is incorrect. IFRS does not allow LIFO as an inventory valuation method
C is correct. The units-of-production method is independent of the useful life estimate.
A is incorrect. The double declining balance method is linked to useful life estimate because the “double” refers to doubling the rate determined under the straight-line method which depends on the useful life.
B is incorrect. The straight-line method is linked to useful life estimate.
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