Brunswick Corporation reported total inventories of $532.6 million on January 1, 2012. Some inventories were valued using FIFO and some using LIFO. A footnote to the financial statements indicated the following: “Inventories valued at the last-in, first-out method (LIFO).were $119.8 million and $118.2 million lower than the FIFO cost of inventories at December 31, 2011 and 2010, respectively.”
1. Has the cost of Brunswick’s LIFO inventories generally been increasing or decreasing?
Explain.
2. Suppose Brunswick sold its entire inventory for $1,000 million the subsequent year and did not replace it. Compute the gross profit from the sale of this inventory (a) as Brunswick would report it using its current inventory methods, and (b) as it would have been reported if Brunswick had always used FIFO instead of LIFO. Which inventory method creates higher gross profit? Explain.