The inventory costing method chosen by a company can affect the financial statements and thus the decisions of the users of those statements.

Required

1. A leading accounting researcher stated that one inventory costing method reports the more recent costs in the income statement, while another method reports the more recent costs in the balance sheet. In this person’s opinion, this results in one or the other of the statements being “inaccurate” when prices are rising. What did the researcher mean?

2. Random Appliances follows conservative accounting and writes the value of its inventory of ovens down to net realizable value, which has declined below cost. The following year, an unexpected baking craze results in a demand for ovens that far exceeds supply, and the net realizable value increases well above the previous cost. What effect will conservatism have on the income of Random Appliances over the 2 years?

3. Why would you want management to be conservative in accounting for inventory if you were 

(a) A shareholder and 

(b) A prospective shareholder?