Question

Assuming purchase costs are declining and a periodic inventory system is used, determine the statements below which correctly describe what is happening to cost of goods sold under FIFO, LIFO and weighted average cost flow methods.

a. In a situation where prices are declining, companies using LIFO will report the smallest cost of goods sold.b. Companies using FIFO will report the smallest cost of goods sold (compared to companies using LIFO or weighted average.)c. Weighted average cost of goods sold will be between FIFO and LIFO costs of goods sold.d. Companies using LIFO will pay higher taxes than companies using FIFO, assuming all else being equal.e. Companies using FIFO will report the highest gross profit and net income.f. Companies using LIFO will report the highest ending inventory on their balance sheets (as compared to companies using FIFO or weighted average,)

Answer 1

Answer:

a. In a situation where prices are declining, companies using LIFO will report the smallest cost of goods sold.

Explanation:

The last in first out method (LIFO) generally results in less net income because Cost of Goods Sold is greater. The reason is that normally prices increase with time due to inflation.

However, the opposite is true when prices are falling, LIFO will report the smallest cost of goods sold.

The reason is the last items are assumed to be sold first, hence the figure of cost of goods sold will be smaller since the costs are smaller compared to the stock bought previously which are more expensive.

Answer 2

Answer: B

Explanation: with a decline in purchase and periodic inventory system is used it's is assumed that LIFO ( last in first out) would report higher sales unlike FIFO