Posted: July 6th, 2016
General Motors and Ford use the last-in, first-out (LIFO) method to value their inventories. Honda (of Japan) and Daimler-Benz (manufacturer of Mercedes-Benz of Germany) use the first-in, first-out (FIFO) method. Under LIFO, recent costs are expensed as cost of goods sold; under FIFO, older costs are expensed as cost of goods sold.
a. Given the income statement effects of LIFO versus FIFO, how will the balance sheet inventory amounts differ between General Motors and Ford versus Honda and Daimler-Benz? In other words, will inventory be reported amounts representing recent costs or older historical costs? In your opinion, which balance sheet amounts would be more useful to financial statement users in making decisions to buy or sell shares of a company’s stock?
b. Discuss the concept of conservatism. In your opinion, which is more conservative, General Motors, and Ford or Honda and Daimler-Benz? Explain.
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