1. During inflationary periods, when costs and prices are generally rising, which inventory costing method do you think would result in a higher net income on the income statement: FIFO or LIFO? Provide support for your response.
Added by Justin M.
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This is because LIFO assumes that the most recently purchased goods are sold first. Since prices are rising, the most recently purchased goods are the most expensive. Show more…
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Reflection: Rising Prices In a period of steadily rising prices (meaning the cost to purchase inventory is increasing over time), what would be the implications of choosing FIFO vs. LIFO? Which method would show a higher net income, and which would show a lower net income? Which method does a better job of matching expenses and revenues? Which method reflects the most recent costs of inventory on the balance sheet? What implications might this have that would be relevant for users of the financial statements to know?
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As compared with the FIFO method of costing inventories, does the LIFO method result in a larger or smaller net income in a period of rising prices? What is the comparative effect on net income in a period of falling prices?
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Assume that a firm separately determined inventory under FIFO and LIFO and then compared the results. a. In each dropdown that follows, select the correct sign [less than (<), greater than (>), or equal (=)] for each comparison, assuming periods of rising prices. 1. FIFO inventory < LIFO inventory 2. FIFO cost of goods sold > LIFO cost of goods sold 3. FIFO net income > LIFO net income 4. FIFO income taxes > LIFO income taxes b. Why would management prefer to use LIFO over FIFO in periods of rising prices? Income shown on the company's tax return would be higher if LIFO rather than FIFO is used. Income shown on the company's tax return would be higher if LIFO rather than FIFO is used. Cost of goods sold shown on the company's income statement would be lower if LIFO rather than FIFO is used. Dividends shown on the company's financial statements would be higher if LIFO rather than FIFO is used.
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Recommended Textbooks
Horngren’s Cost Accounting
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