EXERCISE 4–1 Cost for inventory purposes should be determined by the inventory cost flow method best reflecting periodic income.

Required:

a. Describe the inventory cost flow assumptions of (1) average-cost, (2) FIFO, and (3) LIFO.

b. Discuss management’s usual reasons for using LIFO in an inflationary economy.

c. When there is evidence the value of inventory, through its disposal in the ordinary course of business, is less than cost, what is the accounting treatment? What concept justifies this treatment?