Question

What are the financial statement effects of the following costing methods: First-in, first-out (FIFO) and Last-in, first-out (LIFO)?

A) FIFO: Higher inventory value; LIFO: Lower cost of goods sold
B) FIFO: Lower inventory value; LIFO: Higher cost of goods sold
C) FIFO: Matches recent costs; LIFO: Matches oldest costs
D) FIFO: Matches oldest costs; LIFO: Matches recent costs

Answer 1

Under FIFO, a higher inventory value is recorded as older, cheaper inventory costs are used earlier. In contrast, LIFO reports a lower inventory value and higher cost of goods sold because recent, more expensive inventory costs are used first.

Step-by-step explanation:

The financial statement effects of FIFO (First-in, First-out) and LIFO (Last-in, First-out) costing methods are as follows:

• FIFO: Results in a higher inventory value and a lower cost of goods sold when prices are rising. This is because the older, cheaper costs are matched against current revenues.
• LIFO: Results in a lower inventory value and a higher cost of goods sold under the same conditions. With LIFO, the more recent, higher costs are expensed first.

The correct option that describes these effects is:

D) FIFO: Matches oldest costs; LIFO: Matches recent costs.