Question

The UNO Company was formed on January 2, Year 1, to sell a single product. Over a 2-year period, UNO’s costs increased steadily. Inventory quantities equaled 3 months’ sales at December 31, Year 1, and zero at December 31, Year 2. Assuming the periodic system and no accounting changes, the inventory cost method that reports the highest amount for each of the following is

Inventory 12/31/Year 1
Cost of Sales Year 2

A.LIFO
FIFO
B.LIFO
LIFO
C.FIFO
FIFO
D. FIFO
LIFO

Answer 1

(C) FIFO

FIFO

Step-by-step explanation:

- FIFO inventory tends to be higher than the LIFO inventory when the prices are increasing. Contrary to LIFO, FIFO assumes that the expensive or highest amount goods are in the inventory where as in the case of LIFO these products are first to be sold. So according to the data provided inventory at end of year (December 31) and start of Year 2 is higher for FIFO than LIFO. At end of year 2 amount of goods sold must have equaled the amount of goods purchased which means higher inventory under FIFO than LIFO which means Option C is correct.