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What factors should Precision consider in choosing between the FIFO and average cost formulas?

(((ANSWER)))The sales and the operating expense are the same under both FIFO and average. But the cost of goods sold amounts are different. For this case, the price is rising, so it will have a higher profit than using average. This happens because the expenses matched against revenues are the lower unit costs of the first units purchased. Then, the ending inventory will be higher. So in the balance sheet, the asset will be higher. And the current ratio will be higher. If prices are falling, the results from the use of FIFO and average are reversed. FIFO will report the lower profit and average the higher. If prices are stable, both cost formulas will report the same results.

IS DIS CORRECT ADN IF ANY MISTAKE CAN U EDIT PLZ.THANKS

  • edit plz! -

    Is English your first language?

    If it is, have you slowly read this answer aloud?

  • edit plz! -

    english is my seccond language.

  • edit plz! -

    OK.

    The sales and the operating expenseS are the same under both FIFO and THE AVERAGE COST FORMULAS. But the costS of goods sold amounts are different. For this case, the price is rising, so it will have a higher profit than using THE average. This happens because the expenses matched against revenues are the lower unit costs of the first units purchased. Then, the ending inventory will be higher. So in the balance sheet, the assetS will be higher, AND the current ratio will be higher. If prices are falling, the results from the use of FIFO and average are reversed. FIFO will report the lower profit and average the higher. If prices are stable, both cost formulas will report the same results.

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    thanks ms.Sue ^_^

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    You're welcome, Thara. :-)

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