Final answer:
During a LIFO liquidation, Davis Company should report the older, lower cost of inventory as part of the cost of goods sold, which often results in higher income. This should be disclosed as a non-recurring event if they intend to replace the inventory soon, and they should note the potential impact of higher replacement costs on future income.
Step-by-step explanation:
When the Davis Company, which uses Last In, First Out (LIFO) inventory accounting, experiences a LIFO liquidation, the costs of the older inventory layers are used to value the cost of goods sold. During a LIFO liquidation, these historical costs may be significantly lower than current prices which can lead to a higher reported income for the period. However, if Davis Company plans to replace the liquidated inventory, the temporary reduction in inventory levels and the associated effect on the cost of goods sold might be disclosed as a non-recurring event in the notes to the financial statements.
Moreover, Davis should report any LIFO liquidation profits as part of its normal income in the income statement for the quarter. It is important for the company to inform investors and other financial statement users about the nature of the profit increase due to LIFO liquidation, as it might not represent the company's normal operating performance. With the expectation to replace the inventory in the near future, Davis Company may also need to discuss the potential impact on future cost of goods sold once the inventory is replaced at potentially higher costs.