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

Previous problemNext problem

Struggling with Financial Accounting?

Join thousands of students who trust us to help them ace their exams!Watch the first video

Multiple Choice

Which of the following best describes the effect of using the LIFO inventory costing method during a period of rising prices on the company's financial statements?

Cost of goods sold increases, resulting in lower net income.

Net income is unaffected by the choice of inventory costing method.

Gross profit increases due to lower cost of goods sold.

Ending inventory is valued higher, resulting in higher total assets.

Previous problemNext problem

Verified step by step guidance

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 (first-in) in ending inventory.

Analyze the impact of rising prices: During a period of rising prices, the cost of the most recent inventory purchases will be higher than the cost of older inventory. This means that under LIFO, the cost of goods sold (COGS) will reflect higher costs.

Consider the effect on net income: Higher COGS reduces gross profit, which in turn lowers net income. This is because net income is calculated as gross profit minus operating expenses and taxes.

Evaluate the impact on ending inventory: Since older inventory (purchased at lower prices) remains in ending inventory under LIFO, the ending inventory value will be lower compared to other methods like FIFO (First-In, First-Out).

Summarize the financial statement effects: Using LIFO during a period of rising prices results in higher COGS, lower gross profit, lower net income, and lower ending inventory value, which reduces total assets on the balance sheet.