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E8-21 (LIFO Effect) The following example was provided to encourage
the use of the LIFO method. In a nutshell, LIFO subtracts inflation from
inventory costs, deducts it from taxable income, and records it in a LIFO
reserve account on the books. The LIFO benefit grows as inflation
widens the gap between current-year and past-year (minus inflation)
inventory costs. This gap is
(a) Explain what is meant by the LIFO reserve account.
(b) How does LIFO subtract inflation from inventory costs?
(c) Explain how the cash flow of $174,400 in this example was
computed. Explain why this amount may not be correct.
(d) Why does a company that uses LIFO have extra cash? Explain
whether this situation will always exist.
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ACC 537 Week 2 Textbook Problem P7-4 Bad-Debt Reporting
(Fortner Corporation)
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P7-4 (Bad-Debt Reporting) From inception of operations