Accounting procedures allow a business to evaluate their inventory at LIFO (Last In First Out) or FIFO (First In First Out). A manufacturer evaluated its finished goods inventory (in $ thousands) for five products both ways. Based on the following results, is LIFO more effective in keeping the value of his inventory lower?
If you use the 5% level of significance, what is the critical t value?
A) +2.132
B) $\pm$2.776
C) +2.262
D) $\pm$102.228

Question

Accounting procedures allow a business to evaluate their inventory at LIFO (Last In First Out) or FIFO (First In First Out). A manufacturer evaluated its finished goods inventory (in $ thousands) for five products both ways. Based on the following results, is LIFO more effective in keeping the value of his inventory lower?  
If you use the 5% level of significance, what is the critical t value?
A) +2.132 
B) $\pm$2.776 
C) +2.262 
D) $\pm$102.228

Quizplus · Accepted Answer

To determine if LIFO is more effective in keeping the value of inventory lower, we need to compare the inventory values obtained from LIFO and FIFO. However, we are not given the actual values of the inventory, only the sample means and sample standard deviations. Therefore, we need to conduct a t-test.

Since we want to test if LIFO results in lower inventory values, our hypothesis will be:

Ho: μLIFO ≥ μFIFO (there is no significant difference between LIFO and FIFO inventory values)
Ha: μLIFO < μFIFO (LIFO results in lower inventory values)

We will use a one-tailed test (since our alternative hypothesis specifies directionality) and a significance level of 0.05.

The critical t-value can be calculated using a t-table or a calculator. For our sample size (n = 5) and a significance level of 0.05, the critical t-value is 2.132.

Therefore, we reject the null hypothesis and conclude that LIFO is more effective in keeping the value of inventory lower only if our calculated t-value is less than -2.132.

Accounting Procedures Allow a Business to Evaluate Their Inventory at LIFO