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LIFO vs FIFO: General Motors, Ford vs Honda, Daimler-Benz

General Motors and Ford use the last-in, first-out (LIFO) method to value their inventories. Honda (of Japan) and Daimler-Benz (manufacturer of Mercedes-Benz of Germany) use the first-in, first-out (FIFO) method. Under LIFO, recent costs are expensed as cost of goods sold; under FIFO, older costs are expensed as cost of goods sold.

Required:
a. Given the income statement effects of LIFO versus FIFO, how will the balance sheet inventory amounts differ between General Motors and Ford versus Honda and Daimler-Benz? In other words, will inventory be reported amounts representing recent costs or older historical costs? In your opinion, which balance sheet amounts would be more useful to financial statement users in making decisions to buy or sell shares of a company's stock?

b. Discuss the concept of conservatism. In your opinion, which is more conservative, General Motors, and Ford or Honda and Daimler-Benz? Explain.

Solution Preview

a. Given the income statement effects of LIFO versus FIFO, how will the balance sheet inventory amounts differ between General Motors and Ford versus Honda and Daimler-Benz? In other words, will inventory be reported amounts representing recent costs or older historical costs?

GM and FORD will have older prices in their inventory amount since the most recent prices (last-in) will be expenses in COGS. Honda and Daimler-Benz will have recent prices in their inventory amount since the first-in (oldest prices) are expensed in COGS.

In your opinion, which balance sheet amounts would be more useful to ...

Solution Summary

Your tutorial is 272 words and explains why conservatism is not the ruling principle in selecting inventory methods (and why) and explains how inventory will be reported for these firms.

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