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

Given selected operating data for two divisions of Outback Brewing, Ltd., which of the following statements best describes how the choice between FIFO and LIFO inventory costing methods can affect the financial statements during a period of rising prices?

FIFO will result in higher net income and higher ending inventory values compared to LIFO.

LIFO will result in higher ending inventory values but lower net income compared to FIFO.

LIFO will result in higher net income and higher ending inventory values compared to FIFO.

FIFO and LIFO will produce the same net income and ending inventory values.

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Verified step by step guidance

Understand the key concepts of FIFO (First-In, First-Out) and LIFO (Last-In, First-Out) inventory costing methods. FIFO assumes that the oldest inventory items are sold first, while LIFO assumes that the newest inventory items are sold first.

Consider the impact of rising prices on inventory costs. Under FIFO, the cost of goods sold (COGS) will reflect older, lower costs, while ending inventory will reflect newer, higher costs. This typically results in higher net income and higher ending inventory values during periods of rising prices.

Under LIFO, the cost of goods sold (COGS) will reflect newer, higher costs, while ending inventory will reflect older, lower costs. This typically results in lower net income and lower ending inventory values during periods of rising prices.

Analyze the financial statement implications: Higher net income under FIFO can lead to higher taxes, while lower net income under LIFO can reduce tax liability. Ending inventory values also affect the balance sheet, with FIFO showing higher values during rising prices.

Compare the given statements to the analysis above. The correct statement is: 'FIFO will result in higher net income and higher ending inventory values compared to LIFO,' as this aligns with the effects of rising prices on inventory costing methods.