Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

5. Inventory

Periodic Inventory - FIFO, LIFO, and Average Cost

Financial Accounting

5. Inventory

Periodic Inventory - FIFO, LIFO, and Average Cost

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Multiple Choice

Which of the following is an advantage of using the LIFO (Last-In, First-Out) inventory method during a period of rising costs?

It results in higher reported net income.

It matches the oldest costs with current revenues.

It provides inventory values that closely approximate current replacement costs.

It results in lower taxable income due to higher cost of goods sold.

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Verified step by step guidance

Understand the concept of LIFO (Last-In, First-Out): LIFO is an inventory valuation method where the most recent inventory costs are matched with current revenues, meaning the newest inventory items are considered sold first.

Analyze the impact of rising costs: During a period of rising costs, the most recent inventory (which has higher costs) is used to calculate the cost of goods sold (COGS). This results in higher COGS compared to other methods like FIFO (First-In, First-Out).

Relate higher COGS to taxable income: Since taxable income is calculated as revenue minus expenses (including COGS), higher COGS reduces taxable income, which can be advantageous for businesses aiming to lower their tax liability.

Evaluate the advantages of LIFO: The primary advantage during rising costs is the reduction in taxable income due to higher COGS. This does not necessarily result in higher reported net income but provides tax benefits.

Clarify why other options are incorrect: LIFO does not match the oldest costs with current revenues (this is characteristic of FIFO), nor does it provide inventory values that approximate current replacement costs (this is characteristic of methods like weighted average or specific identification).