Question

Which of the following statements is true regarding the impact of LIFO (Last In, First Out) on the cost of goods sold (COGS) and profits?

a) LIFO results in lower COGS, leading to higher profits.
b) LIFO results in higher COGS, leading to lower profits.
c) LIFO has no impact on COGS or profits.
d) LIFO leads to equalization of COGS and profits.

Answer 1

LIFO results in higher COGS, leading to lower profits. Option b

Step-by-step explanation:

LIFO (Last In, First Out) is an accounting method used to value inventory. Under LIFO, the most recently purchased or produced items are considered to be sold first. This results in higher costs being assigned to the goods sold, increasing the cost of goods sold (COGS) and reducing profits.

For example, let's say a company purchases 100 units of a product at two different prices: 50 units at $10 each and 50 units at $12 each. If the company sells 60 units using LIFO, it will assign the cost of the most recent 60 units (50 units at $12 and 10 units at $10) to the COGS. This will result in a higher COGS and lower profits compared to other inventory valuation methods like FIFO (First In, First Out). Option b