Final answer:
Comparing the inventory costing methods of two companies involves examining the impacts of LIFO and FIFO on inventory valuation and COGS. The LIFO reserve is crucial for adjustments and can signify the method's impact on financial statements. Estimating tax savings under LIFO involves calculating the difference in taxable income with what it would be under FIFO and applying the tax rate.
Step-by-step explanation:
Comparing two companies’ inventory costing methods, namely Last-In, First-Out (LIFO) and another method such as First-In, First-Out (FIFO), requires an understanding of how each method impacts inventory valuation and cost of goods sold (COGS). Under LIFO, the last items purchased or manufactured are considered to be the first sold, which, during periods of inflation, results in a higher COGS and a lower inventory value on the balance sheet. To adjust LIFO inventory and COGS, you may need to calculate the LIFO reserve, which is the difference between the inventory reported using LIFO and what it would have been using FIFO. If the LIFO reserve is significant, it indicates that there is a substantial impact on the financial statements due to the use of LIFO.
Estimating tax savings with the LIFO method can be done by comparing the taxable income under LIFO with what it would be under FIFO. Since LIFO typically results in a higher COGS, the taxable income is lower, leading to tax savings. To quantify this, consider the difference in taxable income times the tax rate; this will give you an estimation of the tax savings attributed to using the LIFO method.