Question

When converting from LIFO to FIFO assuming rising prices, equity (retained earnings) increases by:

a. A fixed percentage
b. A variable amount
c. A decreasing amount
d. A significant amount

Answer 1

Equity (retained earnings) increases by a variable amount when converting from LIFO to FIFO assuming rising prices.

Step-by-step explanation:

When converting from LIFO (Last In, First Out) to FIFO (First In, First Out) assuming rising prices, equity (retained earnings) increases by a variable amount.

In a rising price scenario, the cost of goods purchased earlier (under LIFO) would be lower than the current market price. Therefore, when converting to FIFO, the cost of goods sold would increase, resulting in a higher value for equity (retained earnings).

For example, if a company had 100 units in inventory at $10 each in the LIFO method, and the current market price increased to $15, the cost of goods sold under FIFO would be $1,000 (100 units x $10) compared to $1,500 (100 units x $15) under LIFO. The difference of $500 would be added to equity (retained earnings).