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

Inventory Errors

Financial Accounting

5. Inventory

Inventory Errors

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Multiple Choice

When inventory costs are decreasing, which of the following will occur if a company uses the FIFO (First-In, First-Out) method instead of the LIFO (Last-In, First-Out) method?

Net income will be lower under FIFO than under LIFO.

Ending inventory will be lower under FIFO than under LIFO.

Cost of goods sold will be higher under FIFO than under LIFO.

There will be no effect on net income between FIFO and LIFO.

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Verified step by step guidance

Understand the FIFO (First-In, First-Out) method: Under FIFO, the oldest inventory costs are used to calculate the cost of goods sold (COGS), meaning the inventory purchased first is expensed first.

Understand the LIFO (Last-In, First-Out) method: Under LIFO, the most recent inventory costs are used to calculate the cost of goods sold, meaning the inventory purchased last is expensed first.

Analyze the impact of decreasing inventory costs: When inventory costs are decreasing, the older inventory (used under FIFO) will have a higher cost compared to the newer inventory (used under LIFO). This affects COGS and ending inventory values.

Compare the effects on net income: Higher COGS under FIFO (due to older, higher-cost inventory being expensed) will result in lower net income compared to LIFO, which uses lower-cost inventory for COGS.

Compare the effects on ending inventory: Under FIFO, the ending inventory will consist of the newer, lower-cost inventory, resulting in a lower ending inventory value compared to LIFO, which retains older, higher-cost inventory.