Question

Which of the following statement is the most true: A) In period of rising pricing FIFO tend to give higher value for inventory & higher reported CFO than LIFO. B) In period of rising pricing LIFO tend to give higher value for CGS& lower income & higher reported assets in the balance sheet comparing to FIFO. C) Comparing to FIFO, LIFO provide better matching of expenses with revenue only during a period of rising prices. D) LIFO always provide more realistic value for inventory and assets in the balance sheet than LIFO. E) A & B F) C & D. G. None of the above.

Answer 1

Let us discuss each options A,B,C and D in detail :

Option A: This Option is partially correct. Its completely true that during the period of rising prices FIFO provide higher value of the Inventory. Reason behind the same is that the low prices inventory which were first purchased will be first used in calculating the COST OF GOODS SOLD. Thus the Inventory shall be the Last Purchased Items during the period of higher prices.

   However the point that the CFO is higher in FIFO as compared to LIFO. Let us understand this with an example:

Suppose i purchased first 2 quantity for Rs 300 each and next 2 quantity for Rs 400. During the year i sold 2 Quantity for Rs 500. Let us compare this situation with fifo and lifo method.

Under FIFO method Cash outflow for goods purchased shall be 1400 (300*2+400*2) The Cost of goods sold shall be 600 Thus the profit shall be 1000(500*2) - 600 (300*2) Thus PBT shall be 400 Lets assume tax rate @30% Thus outflow of tax shall be 120(400*30%). Thus Net Cashflow = 1000-1400-120 = -520.  

Under LIFO method Cash outflow for goods purchased shall be 1400 (300*2+400*2) The Cost of goods sold shall be 800 Thus the profit shall be 1000(500*2) - 800 (300*2) Thus PBT shall be 200 Lets assume tax rate @30% Thus outflow of tax shall be 60(200*30%). Thus Net Cashflow = 1000-1400-60 = -460  

Hence this Option is not correct.

Option B: This Option is also partially correct.  In period of rising pricing LIFO tend to give higher value for CGS& lower income is completely correct. However the statement that under LIFO there shall be higher reported asset in balance sheet as compared to FIFO is not correct. As the reported asset under FIFO shall be higher as compared under LIFO

Hence this Option is not correct.

Option C: This statement is correct that Comparing to FIFO, LIFO provide better matching of expenses with revenue only during a period of rising prices. As the price remains same so there wont be much difference between the LIFO and FIFO. As the cost of goods sold shall be latest prices in LIFO thus this helps in matching revenue with the cost more appropriately.

Hence this Option is correct

Option D: As per my opinion this option is not completely written It is written that LIFO always provide more realistic value for inventory and assets in the balance sheet than LIFO. How can LIFO provide more realistic value for inventory and assets in the balance sheet than LIFO only. As per me this statement should be written as FIFO always provide more realistic value for inventory and assets in the balance sheet than LIFO. If it written as this then only this statement shall be correct

Hence at present this option is incorrect but if statement is changed as stated above then it shall be correct

Hence as per the current statement only OPTION C is correct.