Question

What the answer?

Complete the following table by selecting which inventory costing method (FIFO or LIFO) would lead to the effects noted in the rows, for each of the circumstances described in the columns,

Answer 1

1. Declining Costs:

a. Lowest net income: LIFO

b. Lowest ending inventory: FIFO

2. Rising Costs:

a. Lowest net income: FIFO

b. Lowest ending inventory: LIFO

- Declining Costs:

- Lowest net income (a): LIFO assumes that the last items purchased are the first ones sold. In a declining cost scenario, LIFO matches the latest, more expensive inventory with revenue, resulting in higher costs of goods sold (COGS) and lower net income.

- Lowest ending inventory (b): FIFO assumes that the oldest items are sold first. In a declining cost environment, since FIFO matches older, cheaper inventory with revenue, the newer, more expensive inventory remains in the ending inventory, resulting in a higher valuation of ending inventory compared to LIFO.

- Rising Costs:

- Lowest net income (a): FIFO assumes that the oldest inventory is sold first. In a rising cost scenario, FIFO matches lower-cost inventory with revenue, resulting in lower COGS and higher net income.

- Lowest ending inventory (b): LIFO assumes that the last items purchased are the first ones sold. In a rising cost environment, LIFO matches the latest, more expensive inventory with revenue, reducing the valuation of ending inventory compared to FIFO.

These effects occur due to the different ways FIFO and LIFO account for inventory costs and their impacts on cost of goods sold and ending inventory valuation in various cost environments.

Question:

Complete the following table by selecting which inventory costing method (FIFO or LIFO) would lead to the effects noted in the rows, for each of the circumstances described in the columns,

1. declining costs 2. Rising Costs

a. lowest net income

b. lowest ending inventory

Answer 2

Under FIFO, increasing prices lead to higher ending inventory due to older, cheaper inventory; rising inflation boosts net income. LIFO lowers taxable income during inflation with higher COGS.

The completed table is given below:

Circumstances Effects on Financial Statements

Increasing prices Higher ending inventory under FIFO

Decreasing prices Lower ending inventory under FIFO

Rising inflation Higher net income under FIFO

Declining inflation Lower net income under FIFO

Tax advantages (during inflationary periods) Higher tax expense under LIFO

Cost of goods sold Lower cost of goods sold under LIFO

The Complete Question

Inventory costing methods, FIFO (First-In, First-Out) and LIFO (Last-In, First-Out), impact financial statements differently based on various circumstances. Complete the table below by selecting the appropriate inventory costing method (FIFO or LIFO) that would lead to the effects noted in the rows, for each circumstance described in the columns:

Circumstances Effects on Financial Statements

Increasing prices Higher ending inventory under?

Decreasing prices Lower ending inventory under?

Rising inflation Higher net income under?

Declining inflation Lower net income under?

Tax advantages (during inflationary periods) Higher tax expense under?

Cost of goods sold Lower cost of goods sold under?