ExpertMedium1 markMultiple Choice
CPA · Question 19 · Area 2: Financial Statement Analysis
During a period of high inflation, a company using FIFO inventory accounting will report compared to LIFO:
During a period of high inflation, a company using FIFO inventory accounting will report compared to LIFO:
Answer options:
A.
Lower Net Income and Lower Inventory Balance.
B.
Higher Net Income and Lower Inventory Balance.
C.
Lower Net Income and Higher Inventory Balance.
D.
Higher Net Income and Higher Inventory Balance.
How to approach this question
Visualize the flow. Inflation = Prices Rising. FIFO = First In (Cheap) goes to COGS. LIFO = Last In (Expensive) goes to COGS. Low COGS = High Income.
Full Answer
D.Higher Net Income and Higher Inventory Balance.✓ Correct
Under FIFO in inflation, older/lower costs flow to the Income Statement (low COGS = high Income). Newer/higher costs remain on the Balance Sheet (high Inventory).
Common mistakes
Confusing the flow of costs to BS vs IS.
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