Accounting procedures allow a business to evaluate their inventory costs based on two methods: LIFO (Last In First Out) or FIFO (First In First Out). A manufacturer evaluated its finished goods inventory (in $000s) for five products with the LIFO and FIFO methods. To analyze the difference, they computed (FIFO - LIFO) for each product. Based on the following results, does the LIFO method result in a lower cost of inventory than the FIFO method? What are the degrees of freedom?
A)4
B)5
C)15
D)10

Question

Accounting procedures allow a business to evaluate their inventory costs based on two methods: LIFO (Last In First Out) or FIFO (First In First Out). A manufacturer evaluated its finished goods inventory (in $000s) for five products with the LIFO and FIFO methods. To analyze the difference, they computed (FIFO - LIFO) for each product. Based on the following results, does the LIFO method result in a lower cost of inventory than the FIFO method?  What are the degrees of freedom?
A)4 
B)5 
C)15 
D)10

Quizplus · Accepted Answer

To determine whether the LIFO method results in a lower cost of inventory than the FIFO method, we need to look at the sign of the computed differences (FIFO - LIFO) for each product. If the differences are positive for all products, it means that FIFO method results in a higher cost of inventory than the LIFO method. Conversely, if the differences are negative for all products, it means that LIFO method results in a higher cost of inventory than the FIFO method. If some differences are positive and some are negative, we cannot draw a conclusion without conducting a statistical test.

The degrees of freedom for this test are (n-1), where n is the number of products evaluated. In this case, n=5, so the degrees of freedom are 4. Therefore, the answer is A) 4.

Accounting Procedures Allow a Business to Evaluate Their Inventory Costs