Multiple Choice
Which of the following inventory costing methods will result in the highest net income during a period of rising prices?
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5. Inventory
Financial Statement Effects of Inventory Costing Methods
Multiple Choice
In a period of rising purchase prices, the selected inventory costing method (FIFO vs. LIFO) most directly impacts which set of financial statement amounts?
A
Total sales revenue and accounts receivable
B
Paid-in capital and the number of shares outstanding
C
Cash flow from operations and cash paid to suppliers
D
Cost of goods sold, ending inventory, and net income
Verified step by step guidance1
Understand that inventory costing methods like FIFO (First-In, First-Out) and LIFO (Last-In, First-Out) determine how the cost of inventory sold and remaining inventory is calculated during a period.
Recognize that in a period of rising purchase prices, FIFO assumes the oldest (cheaper) inventory is sold first, while LIFO assumes the newest (more expensive) inventory is sold first.
Identify that this difference affects the Cost of Goods Sold (COGS) because FIFO will assign lower costs to COGS and LIFO will assign higher costs to COGS in rising price environments.
Note that since COGS impacts net income (Net Income = Sales Revenue - COGS - Expenses), the choice between FIFO and LIFO will directly affect reported net income.
Understand that ending inventory valuation also changes because FIFO leaves the most recent (higher cost) inventory on the balance sheet, while LIFO leaves the older (lower cost) inventory, affecting the inventory amount reported.
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