Question

Explain why proponents of LIFO argue that it provides a better match of revenue and expenses. In what situation would it not provide a better match? please answer in your own words, do not use the outside resources

Answer 1

• Proponents of LIFO argue that it provides a better match of revenues and expenses because cost of goods sold includes the costs of the most recent purchases which are matched with sales that reflect a current selling price.
• On the other hand, inventory costs in the balance sheet generally are out of date because they are derived from old purchase transactions.
• It is conceivable that a company’s LIFO inventory balance could be based on unit costs actually incurred several years ago.
• When inventory quantity declines during a period, then these out-of-date inventory layers will be liquidated and cost of goods sold will match non current costs with current selling prices.