An annual report issued by General Motors Corporation included the following information:
Inventories are valued using various cost methods. The percentage of year-end inventories valued using each of these methods is:
LIFO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50%
FIFO and Average Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50%
If the LIFO method of valuation had not been used, total inventories would have been $1.4 billion more than reported.
a. Does the company’s use of three different inventory methods violate the accounting principle of consistency? Defend your answer.
b. Had the LIFO method not been used, would the company’s gross profit reported in its income statement have been higher or lower? Explain.
c. On the basis of the information from the company’s annual report, do its inventory replacement costs appear to be rising or falling? Explain.