Question

Which of the following statements is true regarding LIFO (Last In, First Out) inventory valuation method?

a) It reports more recent costs as inventory.
b) It reports older costs as inventory.
c) It reports an average cost for inventory.
d) It reports old costs remaining on the balance sheet as inventory until a liquidation of layers.

Answer 1

The LIFO inventory valuation method reports old costs remaining on the balance sheet as inventory until their eventual liquidation. It leads to higher cost of goods sold and lower ending inventory values during inflationary periods.

Step-by-step explanation:

The correct statement regarding the LIFO (Last In, First Out) inventory valuation method is d) It reports old costs remaining on the balance sheet as inventory until a liquidation of layers. Under LIFO, the most recently acquired items are sold or used first, leaving the older items in inventory. This means that during periods of inflation, LIFO will generally result in higher cost of goods sold and lower remaining inventory values, as the older, usually cheaper items remain on the balance sheet. This can lead to lower taxable income and deferred tax liability. However, it is also important to note that LIFO is not allowed under International Financial Reporting Standards (IFRS).