Question

In 2018, hopyard lumber changed its inventory method from lifo to fifo. inventory at the end of 2017 of $102,000 would have been $120,000 if fifo had been used. inventory at the end of 2018 is $133,000 using the new fifo method but would have been $123,000 if the company had continued to use lifo. what is the effect of the change on 2018 cost of goods sold?

Answer 1

Answer: The Cost of Goods sold will be higher by $8,000 under the FIFO method, than the LIFO method.

When a company changes its inventory accounting method from LIFO to FIFO, the value of its closing inventories will be higher. This can also be seen from the question that gives a higher value of inventories when valued under FIFO relative to LIFO for two consecutive years.

The change in inventory is an important component in computing the Cost of Goods Sold (COGS). The formula for cost of goods sold is:

$COGS = Net Purchases - (ending inventory - beginning inventory)$

From the formula we can infer that an increase in inventory during a given period will reduce the COGS, while a decrease in inventory will increase the COGS.

In this question, Ending inventory -  Beginning inventory under FIFO is $133000-120000 = 13000$.

However, Ending inventory - Beginning inventory under LIFO would have been $123000-102000 = 21000$

Since the change in inventory value is lower in FIFO than in LIFO, the COGS will be higher by $8000 (21000-13000)$ using FIFO than when using the LIFO method.