Accounting procedures allow a business to evaluate their inventory at LIFO (Last In First Out) or FIFO (First In First Out). A manufacturer evaluated its finished goods inventory (in $ thousands) for five products both ways. Based on the following results, is LIFO more effective in keeping the value of his inventory lower? What are the degrees of freedom?
A) 4
B) 5
C) 15
D) 10

Question

Accounting procedures allow a business to evaluate their inventory at LIFO (Last In First Out) or FIFO (First In First Out). A manufacturer evaluated its finished goods inventory (in $ thousands) for five products both ways. Based on the following results, is LIFO more effective in keeping the value of his inventory lower?  What are the degrees of freedom?
A) 4 
B) 5 
C) 15 
D) 10

Quizplus · Accepted Answer

To compare the effectiveness of LIFO and FIFO, we need to perform a paired t-test. Since we have five products and we are comparing two methods of inventory valuation for each product, we have a total of 5 paired differences in inventory valuation. Therefore, the degrees of freedom (df) for the t-test will be (n-1), where n is the number of paired differences. Hence, df = 5-1 = 4. So, option A is the correct choice. To determine whether LIFO is more effective in keeping the value of the inventory lower than FIFO, we can perform the paired t-test on the paired differences and compare the p-value to the significance level. However, the data for the paired differences is not given in the question, so it is not possible to perform the test or make a conclusion based on the given information.

Accounting Procedures Allow a Business to Evaluate Their Inventory at LIFO