Oliver & Co. has been in business for fifteen years. During that time, the company has consistently used the LIFO inventory costing method. Because of inflation, purchase prices for merchandise have increased consistently over the fifteen years. The company has maintained the same inventory quantities over the 15 years. Which of the following statements is true for the company?

Question

Quizplus · Accepted Answer

As the company has consistently used the LIFO inventory method over the fifteen years and purchase prices have increased, the ending inventory amount reported on the balance sheet may be significantly lower than its current value. This is because the LIFO method assumes that the latest inventory bought is sold first, which means that the company's inventory on the balance sheet may consist of goods bought at lower prices several years ago. This divergence of book value and market value of inventory is known as the LIFO reserve.