Question

As a firm liquidates LIFO layers of inventory, the costs of the LIFO layers are matched against current sales dollars resulting in a gross profit margin that is:

Select one:

a. Higher than under FIFO.

b. Lower than under FIFO.

c. The same as under FIFO.

d. More information is needed.

Clear my choice

Answer 1

b. Lower than under FIFO

Reason:

Gross Profit = Sales - Cost of Goods Sold

When LIFO method is followed, the latest cost of purchases are considered for computation of cost of goods sold. Latest costs will be comparatively higher than the cost of earlier purchases considering inflation and various other economic factors.

Therefore, when cost of goods sold is higher, it will result in lower profits as compared to FIFO method of inventory valuation.

Hence, option B.