State the true and false with reason:- [2 Marks each]
1. In Inflation LIFO method will value the stock higher than FIFO Method.
2. The Proprietor of a shop feels that he has made a loss due to closing stock being zero.
3. Loss of Stock is said to be normal loss when such loss in not due to inherent characteristics
of the commodities.
4. Inventory is shown in Balance Sheet as fixed Assets.
Answers
Answer:
Inventories are the largest current asset of any business. Inventory valuation is a process through which companies or businesses offer monetary value for their inventories and generate accurate financial statements. It is important to measure inventories for matching expenses and revenue figures and take good business decisions for a long-term.
Ideally, there are two ways of doing so: LIFO (Last-in, first-out) and FIFO (First-in, first-out). Businesses are often confused about FIFO Vs LIFO. In this article, we’ve explained each inventory valuation method in detail with examples.
What is LIFO?
The LIFO (Last-in, first-out) process is mainly used to place an accounting value on inventories. It is based on the theory that the last inventory item purchased is the first one to be sold. LIFO method is like any store where the clerks stock the last item from front and customers purchase items from front itself. This means that inventory located at the back is never bought and therefore remains in the store. Presently, LIFO is hardly practiced by businesses since inventories are rarely sold, therefore they become old and gradually lose their value. This brings significant loss to company’s business.
The only reason for using LIFO is when companies assume that inventory cost will increase over time, which means prices will inflate. While implementing LIFO system, cost of recently obtained inventories goes higher, as compared to inventories, purchased earlier. As a result, the ending inventory balance is valued at previous costs whereas the most recent costs appear in the cost of goods sold. By moving high-cost inventories to cost of goods sold, businesses can lower their reported profit levels and defer income tax recognition. Therefore, income tax deferral is the most common answer for using LIFO while evaluating current assets. Due to this, it is strictly banned according to standards of financial reporting; however prevalent across US.
Explanation:
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Answer:
Explanation:
1. In Inflation LIFO method will value the stock higher than FIFO Method.
(False)
Due to higher COGS, the LIFO approach yields lower net profitability. Because COGS are valued using inventory that may be several years old, FIFO not only improves net income but also offers us an excellent estimate of the ending inventory value.
2. The Proprietor of a shop feels that he has made a loss due to closing stock being zero.
(False)
The closing stock is valued using the prudential principle by using the lowest of the market price or cost. Therefore, the closing stock should be valued at cost or market price, whichever is lower, when preparing a consignment account if the market price of the stock is also known.
3. Loss of Stock is said to be normal loss when such loss in not due to inherent characteristics
(False)
Since only the possession of the goods is transferred during consignment, commodities sent on consignment do not pass into the consignee's ownership. Until they are sold, the consignor retains ownership of the goods. The consignor, not the consignee, keeps track of these items as inventory.
Selling the products in accordance with the consignor's instructions is the obligation of the consignee. The consignee transfers the remaining funds to the consignor after deducting his costs and commission from the sale proceeds once the products have been sold. The consignee is not held liable if the consigned goods are lost or stolen. The responsibility for the loss rests with the consignor.
4. Inventory is shown in Balance Sheet as fixed Assets.
(False)
The assets that a business uses over the long term are known as fixed assets. Fixed assets are listed at cost less depreciation on the balance sheet. Depreciation is the process of allocating an asset's cost by deducting it over the course of the asset's life. It is also used to document how much an object has lost in value over time and through normal wear and tear.
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