Which of the following statements is correct? Multiple Choice

a. LIFO results in a higher net income than FIFO when costs are rising.

b. LIFO results in the same net income as FIFO when costs are rising.

c. FIFO results in a lower net income than LIFO when costs are rising.

d. LIFO results in a higher net income than FIFO when costs are falling.

Question

Business

Felipe Brennan

2 November, 13:40

Which of the following statements is correct? Multiple Choice

a. LIFO results in a higher net income than FIFO when costs are rising.

b. LIFO results in the same net income as FIFO when costs are rising.

c. FIFO results in a lower net income than LIFO when costs are rising.

d. LIFO results in a higher net income than FIFO when costs are falling.

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Answers (1)

Know the Answer?

Nikhil Friedman · Answer 1

Answer: D - LIFO results in a higher net income than FIFO when costs are falling.

Explanation:

The LIFO and FIFO are methods of accounting for inventory.

LIFO means last in, first out. It means the last inventory purchased is the first inventory sold.

FIFO means first in, first out. It means older inventories are sold off first.

During period of rising prices, LIFO results in lower net income because the Cost of Goods Sold is higher. Inventories cost more during periods of rising prices.

When prices are falling, the LIFO method results in a lower cost of goods sold and therefore a higher net income.