EXERCISE 8.3

Physical Flow versus Cost Flow Assumptions

The Comfort Store sells heating oil, coal, and kerosene fuel to residential customers. Heating oil is kept in large storage tanks that supply the companys fleet of delivery trucks. Coal is kept in huge bins that are loaded and emptied from the top by giant scooping machines. Kerosene is sold off the shelf in five-gallon containers at the companys retail outlet. Separate inventory records are maintained for each fuel type.

a. Which of the cost flow assumptions (average-cost, FIFO, or LIFO) best describes the physical flow of:

1.The heating oil inventory? Explain.

2.The coal inventory? Explain.

3.The kerosene inventory? Explain.

b. Which of these cost flow assumptions is likely to result in the lowest income tax liability for the company? Explain.

c. Explain why management keeps separate inventory records for its heating oil, coal, and kerosene inventories.