Multiple Choice
Within a local pizza shop, financial analysis is most likely used to:
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5. Inventory
Financial Statement Effects of Inventory Costing Methods
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Based on the above data for your company, which of the following statements about inventory costing methods is FALSE?
A
Under FIFO, ending inventory will be higher during periods of rising prices compared to LIFO.
B
Weighted average cost method smooths out price fluctuations over the period.
C
The choice of inventory costing method affects both the balance sheet and the income statement.
D
LIFO results in lower cost of goods sold than FIFO when prices are rising.
Verified step by step guidance1
Understand the key inventory costing methods: FIFO (First-In, First-Out), LIFO (Last-In, First-Out), and Weighted Average Cost. Each method determines how inventory costs are assigned to Cost of Goods Sold (COGS) and ending inventory.
Analyze the impact of FIFO during periods of rising prices. Under FIFO, the oldest inventory costs are used for COGS, leaving the newer, higher-cost inventory in ending inventory. This results in higher ending inventory values and lower COGS compared to LIFO.
Examine the LIFO method during periods of rising prices. Under LIFO, the newest inventory costs are used for COGS, leaving the older, lower-cost inventory in ending inventory. This results in higher COGS and lower ending inventory values compared to FIFO.
Evaluate the Weighted Average Cost method. This method calculates an average cost per unit for all inventory available during the period, smoothing out price fluctuations and providing a consistent cost basis for both COGS and ending inventory.
Identify the false statement: 'LIFO results in lower cost of goods sold than FIFO when prices are rising.' This is incorrect because LIFO results in higher COGS than FIFO during periods of rising prices, as it uses the most recent (higher) inventory costs for COGS.
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