Brown Corporation uses the FIFO method for internal reporting purposes and LIFO for external reporting purposes.The balance in the LIFO Reserve account at the end of 2007 was $60,000.The balance in the same account at the end of 2008 is $90,000.Brown's Cost of Goods Sold account has a balance of $450,000 from sales transactions recorded during the year.What amount should Brown report as Cost of Goods Sold in the 2008 income statement?
A)$420,000.
B)$450,000.
C)$480,000.
D)$540,000.

Question

Quizplus · Accepted Answer

Since Brown uses LIFO for external reporting, the Cost of Goods Sold amount needs to be calculated using the LIFO method. The increase in the LIFO Reserve account from $60,000 to $90,000 represents the amount of inventory cost inflation that occurred during the year. This means that the cost of goods sold needs to be increased by $30,000 (the difference in the LIFO Reserve balances) in order to convert the FIFO Cost of Goods Sold to LIFO Cost of Goods Sold. Therefore, the LIFO Cost of Goods Sold for 2008 is $480,000 ($450,000 + $30,000), which is the amount that Brown should report on the income statement. Choice C is the correct answer.

Brown Corporation Uses the FIFO Method for Internal Reporting Purposes