Multiple Choice
Which of the following best describes the balance sheet effect of a short-term (less than 1 year) lease under current accounting standards?
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5. Inventory
Financial Statement Effects of Inventory Costing Methods
Multiple Choice
Which of the following statements best describes the effect of using the LIFO inventory costing method during periods of rising prices?
A
LIFO results in lower cost of goods sold and higher net income compared to FIFO.
B
LIFO results in higher cost of goods sold and lower net income compared to FIFO.
C
LIFO results in higher ending inventory values than FIFO during periods of rising prices.
D
LIFO and FIFO produce the same net income during periods of rising prices.
Verified step by step guidance1
Understand the concept of LIFO (Last-In, First-Out) inventory costing method: Under LIFO, the most recent inventory purchases (last-in) are assumed to be sold first, leaving older inventory costs in ending inventory.
Understand the concept of FIFO (First-In, First-Out) inventory costing method: Under FIFO, the oldest inventory purchases (first-in) are assumed to be sold first, leaving newer inventory costs in ending inventory.
Analyze the impact of rising prices on LIFO: During periods of rising prices, the most recent inventory costs (higher costs) are matched to cost of goods sold under LIFO, resulting in higher cost of goods sold.
Analyze the impact of rising prices on net income under LIFO: Since cost of goods sold is higher under LIFO during rising prices, net income will be lower compared to FIFO, which uses older (lower) costs for cost of goods sold.
Compare ending inventory values under LIFO and FIFO: Under LIFO, older (lower) costs remain in ending inventory, resulting in lower ending inventory values compared to FIFO, which retains newer (higher) costs in ending inventory during rising prices.
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