Financial Questions and Answers
Q: A stock that I own is soon to split two for one. Does this mean that the dollar value of my shares will double?
A: No. At the moment the split occurs, you will own twice as many shares as you did the day before, but the value of those shares will remain unchanged. Let’s say you own 500 shares in Acme Corp., with each share valued at $50, for a total value of $25,000. Acme announces a two-for-one split, doubling the number of shares you own to 1,000. However, since all the similarly situated shareholders now have double the amount of shares, your 1,000 shares are still worth only $25,000.
Q: What are the differences between the FIFO and LIFO methods of inventory accounting?
A: FIFO stands for first in, first out, while LIFO stands for last in, first out. When valuing a company’s inventory, FIFO assumes that the oldest inventory is used first. In an environment in which prices are rising, using the FIFO method results in a lower cost of goods sold and a higher ending inventory number than would be the case if the LIFO method is used. Using FIFO makes both the bottom line and the balance sheet stronger compared with LIFO, assuming rising inventory prices. For tax reasons, profitable companies with large inventories and rising costs sometimes prefer to use LIFO.
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