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

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Multiple Choice

Which of the following is a disadvantage of using the unit LIFO (Last-In, First-Out) inventory method?

It can result in outdated inventory values on the balance sheet.

It always results in the lowest cost of goods sold during periods of rising prices.

It is the simplest inventory method to apply.

It matches the most recent costs with the earliest revenues.

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Verified step by step guidance

Understand the concept of LIFO (Last-In, First-Out) inventory method: LIFO assumes that the most recently purchased or produced inventory items are sold first, leaving older inventory items on the balance sheet.

Analyze the disadvantages of LIFO: One key disadvantage is that it can result in outdated inventory values on the balance sheet because older inventory costs remain unsold and are reported as assets.

Evaluate the impact of LIFO during periods of rising prices: LIFO typically results in higher cost of goods sold (COGS) because the most recent, higher-cost inventory is sold first, reducing taxable income but potentially distorting inventory valuation.

Compare LIFO with other inventory methods: Unlike FIFO (First-In, First-Out), which uses older costs for COGS and newer costs for inventory valuation, LIFO can lead to less accurate representation of current inventory values.

Review the options provided in the question: Identify which statement aligns with the disadvantages of LIFO, focusing on outdated inventory values on the balance sheet as the correct answer.