Question

Given stable inventory quantities and rising prices, use of LIFO will most likely:

a) Overstate net income.
b) Understate net income.
c) Understate inventory.
d) Overstate the cost of goods sold (COGS).

Answer 1

Using LIFO with stable inventory quantities and rising prices will likely overstate the cost of goods sold (COGS).

Step-by-step explanation:

When using LIFO (Last In, First Out) method of inventory valuation with stable inventory quantities and rising prices, it will most likely overstate the cost of goods sold (COGS). LIFO assumes that the most recent items purchased are the first ones sold, which means that the higher-priced items will be matched with current costs of goods sold. As a result, the cost of goods sold will be higher and net income will be lower compared to using other inventory valuation methods like FIFO (First In, First Out).