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

Financial Statement Effects of Inventory Costing Methods

Financial Accounting

5. Inventory

Financial Statement Effects of Inventory Costing Methods

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Multiple Choice

Which of the following best explains why the three inventory costing methods (FIFO, LIFO, and Weighted Average) will normally each yield different amounts of net income?

Because the methods require different physical inventory counts at year-end.

Because each method assigns different costs to cost of goods sold and ending inventory, affecting net income.

Because all three methods use different sales prices for revenue recognition.

Because only FIFO and LIFO are accepted under generally accepted accounting principles (GAAP).

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Verified step by step guidance

Understand the three inventory costing methods: FIFO (First-In, First-Out), LIFO (Last-In, First-Out), and Weighted Average. These methods determine how inventory costs are assigned to Cost of Goods Sold (COGS) and Ending Inventory.

Recognize that the primary difference between these methods lies in how they allocate costs to inventory sold and inventory remaining. This allocation impacts the calculation of net income.

Analyze the effect of each method: FIFO assumes the oldest inventory is sold first, leading to lower COGS and higher net income in times of rising prices. LIFO assumes the newest inventory is sold first, leading to higher COGS and lower net income in the same scenario. Weighted Average smooths out cost fluctuations by averaging the cost of all inventory items.

Understand that the physical inventory count at year-end is the same regardless of the method used. The difference arises from the cost assigned to the inventory, not the quantity of inventory counted.

Conclude that the correct explanation is: 'Because each method assigns different costs to cost of goods sold and ending inventory, affecting net income.' This is due to the varying cost allocation strategies inherent in FIFO, LIFO, and Weighted Average methods.