Question

If inventory increases under the retail method, which of the following is true: a. Under the Average Cost retail method, a new layer would be added. b. All of these are true. c. Under the Dollar Value LIFO retail method, no new layer would be added. d. Under the LIFO retail method, a new layer would be added.

Answer 1

d. Under the LIFO retail method, a new layer would be added.

Step-by-step explanation:

The retail method is used to estimate ending inventory/cost of goods sold and is widely used for financial reporting purposes, especially for quarterly financial statements. Retail methods are usually used with the weighted average cost flow assumption, FIFO or LIFO.

Now when the inventory increases under the retail method, LIFO retail method is the best to use because it gives you the highest cost of goods sold and the lowest taxable income. LIFO layer refers to a tranche of cost in an inventory costing system that follows the last-in, first-out (LIFO) cost flow assumption. Therefore when inventory increases under the LIFO retail method, a new layer would be added.