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ACC 537 Week 2 E8 21 LIFO Effect
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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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