Question A

Using FIFO ensures that the balance sheet shows inventory at the current costs given that the ending inventory is represented in the most recent purchases. As a result, a company’s balance sheet will indicate higher amounts of asset under this method. LIFO on its side gives a reverse picture. In this case, General Motors and Ford will showcase older historical cost amounts that act as a representation of the reported inventory since the first-in or most recent prices under LIFO are expensed in cost of goods sold. Honda and Daimler-Benz, on the other hand, will showcase recent prices in the inventory amount because the first-in or older prices are expensed in cost of goods sold.

FIFO makes the balance sheet amounts more useful to financial statement users. This is because out of date costs will not be helpful to decision makers that are trying to understand the resources available and how to manage them. This makes FIFO more useful for users that are trying to make a decision on whether to buy or sell shares since the costs are a better representation of actual costs and relative value.

Question B

Conservatism entails an approach for choosing an accounting method when the individual involved is in doubt on whether it will least likely overstate the assets and net income. It is more of a cautious approach to uncertainty to ensure that risks and uncertainty that are relevant to the business are adequately considered.

In my opinion, General Motors and Ford come out as being more conservative since they use LIFO to value inventory.   LIFO records the most recent inventory as sold first hence making the balance to indicate lower amounts of assets and a smaller amount of inventory while the income statement shows a smaller amount of gross margin and higher amount of cost of sales, therefore, showing a smaller amount of net income.

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