Question

When prices are rising, the value of ending inventory using the FIFO method rather than LIFO gives:
inventory a higher value but lowers net income.
inventory a lower value and also lowers net income.
inventory a lower value and net income a higher value.
both inventory and net income a higher value.

Answer 1

Answer:

The answer is D. both inventory and net income a higher value.

Explanation:

FIFO is First in First Out. This means what was bought first goes out first.

LIFO is Last in First out. This means what was bought last was sold first.

For FIFO, in time of rising price, the ending inventory will contain the ones bought last when the price is rising, so the ending inventory will be higher and for LIFO, the last inventory with high price will b sold out first, remaining the inventory that was bought at cheaper rate.

In FIFO, because the ending inventory is high, cost of sales will be low and this means high gross profit and operating profit or net income