Question

During periods of increasing costs, the use of the FIFO method of costing inventory will yield an inventory amount for the balance sheet that is _______ than LIFO would produce?

1) Higher
2) Lower
3) Equal
4) Cannot be determined

Answer 1

In periods of increasing costs, FIFO results in higher inventory values on the balance sheet than LIFO because FIFO leaves the most expensive, recent inventory in the count, while LIFO accounts for the sale of more expensive, recent inventory first.

Step-by-step explanation:

During periods of increasing costs, the use of the FIFO (First In, First Out) method of costing inventory will yield an inventory amount for the balance sheet that is higher than what LIFO (Last In, First Out) would produce. The reason is that FIFO assumes that the oldest, typically less expensive inventory is sold first, leaving the most recently acquired, more expensive inventory on the balance sheet. In contrast, LIFO assumes the newest inventory is sold first, which in a period of rising costs means the less expensive, older inventory stays on the balance sheet, resulting in a lower inventory value compared to FIFO.