Question

Shepard Company sold 4,000 units of its product at \(100 per unit in year 2017 and incurred operating expenses of \)15 per unit in selling the units. It began the year with 840 units in inventory and made successive purchases of its product as follows.

Jan 1	Beginning Inventory	840 units @ \(58 per unit
April 2	Purchases	600 units @ \)59 per unit
June 14	Purchases	1,205 units @ \(61 per unit
Aug 29	Purchases	700 units @ \)64 per unit
Nov 18	Purchases	1,655 units @ $65 per unit
Total		5,000 units

Required

What advantages and disadvantages are offered by using (a) LIFO and (b) FIFO? Assume the continuing trend of increasing costs.

Short answer

Method	Advantage	Disadvantage
LIFO	Reduction in tax liability	Lower EPS and Understatement of inventory.
FIFO	Higher Net income and EPS, the market value of inventory.	Higher tax liability

Step-by-step solution

Definition of Earnings Per Share

Earnings per share is a financial metric calculated using the net income and outstanding shares reflecting the income generated by the company for each of its shareholders.

Advantages and Disadvantages of LIFO When the Prices are Increasing

Advantages: Under rising prices, LIFO will report a higher cost of goods sold and lower net income, reducing tax liability.

Disadvantages: Under rising prices, if the LIFO is used, it will generate lower net income and earnings per share. The inventory of the balance sheet will be understated.

Advantages and Disadvantages FIFO When the Prices are Increasing

Advantages: Adopting the FIFO method under rising prices will raise net income and EPS, and the inventory will be reported at its market value.

Disadvantages: A business entity will report higher tax liability using the FIFO method for inventory valuation under rising prices.