Some companies that use a perpetual inventory system and the LIFO flow assumption restate their inventories at year-end to the amount indicated by periodic LIFO costing procedures. The primary reason for this adjustment is that:
A) Periodic LIFO often results in a higher valuation of inventory, thus reducing taxable income.
B) This adjustment is necessary to record shrinkage losses.
C) Periodic LIFO often results in a lower valuation of inventory, thus reducing taxable income.
D) Periodic and perpetual costing procedures produce the same results if the year-end inventory has been counted properly. No adjustment would be needed.

Question

Quizplus · Accepted Answer

Periodic LIFO often results in a lower valuation of inventory because the cost of the most recent purchases, which are likely to be higher, are matched against revenue before the cost of earlier lower priced purchases. Restating the inventory to the amount indicated by periodic LIFO costing procedures can reduce taxable income by showing a lower ending inventory value. This adjustment is not related to shrinkage losses. It is necessary because periodic and perpetual costing procedures may produce different inventory valuation results, even if the year-end inventory has been counted properly.

Some Companies That Use a Perpetual Inventory System and the LIFO