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

Previous problemNext problem

Struggling with Financial Accounting?

Join thousands of students who trust us to help them ace their exams!Watch the first video

Multiple Choice

In periods of rising prices, which of the following is an advantage of using the LIFO (Last-In, First-Out) inventory costing method?

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

It matches the oldest costs with current revenues.

It produces the highest net income among all inventory methods.

It results in inventory values that closely approximate current replacement costs.

Previous problemNext problem

Verified step by step guidance

Understand the LIFO (Last-In, First-Out) inventory costing method: Under LIFO, the most recent inventory costs (the last items purchased) are matched with current revenues, meaning the newest costs are used to calculate the cost of goods sold (COGS).

Analyze the impact of rising prices: In periods of rising prices, the most recent inventory costs are higher than older costs. Since LIFO uses the most recent costs for COGS, the COGS will be higher under LIFO compared to other methods like FIFO (First-In, First-Out).

Consider the effect on taxable income: Higher COGS reduces gross profit, which in turn lowers taxable income. This is an advantage for companies as it reduces their tax liability during periods of rising prices.

Evaluate the other options: The statement 'It matches the oldest costs with current revenues' is incorrect because LIFO matches the newest costs with current revenues. The statement 'It produces the highest net income among all inventory methods' is also incorrect because higher COGS under LIFO results in lower net income. Lastly, 'It results in inventory values that closely approximate current replacement costs' is incorrect because LIFO leaves older, lower costs in inventory, which may not reflect current replacement costs.

Conclude that the correct answer is: 'It results in lower taxable income due to higher cost of goods sold,' as this is the primary advantage of using LIFO in periods of rising prices.