Question

By two years of operation, Big Fish Company’s inventory costs were rising. which means LIFO or FIFO gives the lowest ending inventory valuation on the balance sheet and which method gives the lowest net income?

A: Net Income: LIFO; Ending Inventory: FIFO

B: NI: FIFO; EI: LIFO

C: EI & NI: FIFO

D: EI & NI: LIFO

Answer 1

Option D is correct. Net income : LIFO ; Ending inventory : LIFO

In case of LIFO the inventory arrives last will sell first and the inventory arrives first will sell last. In case of FIFO the inventory come first will sell first and inventory come last will sell last.

That's why LIFO means Last In First Out and FIFO means First In First Out.

When prices are rising LIFO gives highest value in cost of goods sold as it sell last arrived goods which has highest price and thus the value of cost of goods sold is higher and net income will be lower. So inorder to get lowest net income in rising prices LIFO should be used.

When prices are rising LIFO gives highest value in cost of goods sold as it sell last arrived goods which has highest price and thus the value of cost of goods sold is higher and net income will be lower and the value in ending inventory will be low because the first arrived goods will be in ending inventories which has lowest cost.

Thus inorder to get lowest net income and lowest ending inventory valuation while prices are rising, we should use LIFO method.