Question

Tanner Corporation's inventory on its balance sheet was lower using first-in, first-out than it would have been using last-in, first-out. Assuming no beginning inventory, in what direction did the cost of purchases move during the period?

a. Up
b. Down
c. Steady
d. Cannot be determined

Answer 1

The costs of purchases for Tanner Corporation moved in the increasing cost direction during the period, as indicated by the lower inventory valuation under FIFO compared to LIFO with no beginning inventory.

Step-by-step explanation:

Tanner Corporation's inventory on its balance sheet was lower using first-in, first-out (FIFO) than it would have been using last-in, first-out (LIFO). If we assume that there was no beginning inventory, this implies that the cost of purchases moved in the increasing cost direction during the period. Under FIFO, the earliest (and in this case, cheaper) costs are recorded as the cost of goods sold, which would result in lower inventory costs on the balance sheet if the costs were increasing throughout the period. Conversely, under LIFO, the most recent (and more expensive) purchases are recorded as the cost of goods sold. This would lead to a higher inventory valuation on the balance sheet if costs were increasing.