Multiple Choice
Under the FIFO (First-In, First-Out) method in periodic inventory systems, which of the following statements is correct?
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5. Inventory
Periodic Inventory - FIFO, LIFO, and Average Cost
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?
A
It results in higher reported net income.
B
It matches the oldest costs with current revenues.
C
It provides inventory values that closely approximate current replacement costs.
D
It results in lower taxable income due to higher cost of goods sold.
Verified step by step guidance1
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).
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