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 inventory costing methods will result in the highest net income during a period of rising prices?

FIFO (First-In, First-Out)

Specific Identification

LIFO (Last-In, First-Out)

Weighted Average Cost

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Verified step by step guidance

Understand the concept of inventory costing methods: FIFO, LIFO, Weighted Average Cost, and Specific Identification. Each method determines how the cost of inventory is allocated to cost of goods sold (COGS) and ending inventory.

Recognize the impact of rising prices on inventory costing methods. During a period of rising prices, the cost of inventory purchased later will be higher than the cost of inventory purchased earlier.

Analyze FIFO (First-In, First-Out): Under FIFO, the oldest inventory costs are assigned to COGS, meaning the lower costs are matched with sales. This results in a lower COGS and higher net income during periods of rising prices.

Compare LIFO (Last-In, First-Out): Under LIFO, the newest inventory costs are assigned to COGS, meaning the higher costs are matched with sales. This results in a higher COGS and lower net income during periods of rising prices.

Evaluate Weighted Average Cost and Specific Identification: Weighted Average Cost averages all inventory costs, leading to a moderate impact on net income. Specific Identification assigns actual costs to specific items, which depends on the inventory sold and does not consistently result in the highest net income during rising prices.