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7/18/06

12:29 PM

Page 335

Issue 3: Cost Flow Assumptions

335

EXHIBIT 7.3

Comparison of Cost Flow Assumptions, Historical Cost Basis

Assumed Data Beginning Inventory: TV Set 1 Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases: TV Set 2 Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TV Set 3 Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of Goods Available for Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales: One TV set . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost Flow Assumption FIFO Financial Statements Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of Goods Sold . . . . . . . . . . . . . . . . . . . . . . . . . Gross Margin on Sales . . . . . . . . . . . . . . . . . . . . . . . Ending Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . aTV $250 290 300 $840 $550

Weighted Average (2) $550 280b $270 $560e

LIFO (3) $550 300c $250 $540f

(1) $550 250a $300 $590d

set 1 costs $250. TV sets costs $280 ( cTV set 3 costs $300. bAverage dTV

$840/3).

sets 2 and 3 cost $290 $300 $590. average TV sets cost 2 $280 $560. fTV sets 1 and 2 cost $250 $290 $540. eTwo LAST-IN, FIRST-OUT
The last-in, first out (LIFO) cost flow assumption assigns the costs of the latest units acquired to the withdrawals and assigns the costs of the oldest units to the ending inventory. Some theorists argue that LIFO matches current costs to current revenues and, therefore, that LIFO better measures income. Column (3) of Exhibit 7.3 illustrates LIFO. LIFO assumes that the firm sells TV set 3 costing $300 while the costs of TV sets 1 and 2 remain

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