Question

If inventory levels are stable or increasing, an argument which is not an advantage of the LIFO method as compared to FIFO is

a.income taxes tend to be reduced in periods of rising prices.
b.cost of goods sold tends to be stated at approximately current cost on the income statement.
c.income tends to be smoothed as prices change over time.
d.cost assignments typically parallel the physical flow of goods.

Answer 1

In the inventory accounting context, LIFO does not have the advantage of paralleling the physical flow of goods; that is more characteristic of FIFO. In broader economic terms, considering substitution bias and quality/new goods bias is crucial for accurate inflation measurements, as they address consumer behavior and market changes.

Step-by-step explanation:

When discussing inventory accounting methods like LIFO (Last-In, First-Out) or FIFO (First-In, First-Out), it is essential to consider the impacts of inventory levels and cost assumptions on the financial statements. One statement that is not an advantage of LIFO compared to FIFO, particularly when inventory levels are stable or increasing, is that cost assignments typically parallel the physical flow of goods. This is more characteristic of FIFO, where the oldest costs (usually the first goods in) are matched to sales, approximating the actual physical flow of goods. Conversely, LIFO assumes the most recent costs are matched to sales, which can be counterintuitive to the actual physical flow if the newest inventory is still on hand.

With respect to measurements like inflation or cost of living adjustments (COLA), it is important to understand challenges like substitution bias and quality/new goods bias. These biases can distort the accuracy of inflation measurements by not accounting for consumer behavior in substituting goods when prices rise or recognizing improvements in living standards when new, better-valued goods emerge in the market.