Question

Which of the following statements is correct?

A) FIFO results in a lower net income than LIFO when costs are rising.
B) LIFO results in a higher net income than FIFO when costs are rising.
C) LIFO results in a higher net income than FIFO when costs are falling.
D) LIFO results in the same net income as FIFO when costs are rising.

Answer 1

The correct statement is that FIFO results in a lower net income than LIFO when costs are rising because FIFO records older, lower costs as COGS, whereas LIFO records more recent, higher costs.

Step-by-step explanation:

The correct statement among the options provided is A) FIFO results in a lower net income than LIFO when costs are rising. FIFO (First-In, First-Out) assumes that goods purchased first are sold first, so the oldest costs are recorded as Cost of Goods Sold (COGS). On the other hand, LIFO (Last-In, First-Out) assumes that the most recently acquired goods are sold first, which means the latest costs are recorded as COGS. When costs are rising, LIFO will result in higher COGS because the most recent, higher costs are factored in, thereby reducing net income. Conversely, FIFO will show a lower COGS with the older, lower costs being recorded. Thus, under FIFO, companies report a higher net income compared to LIFO in a period of rising costs.