Question

A company has the following information related to its ending inventory:

	FIFO				LIFO
12/31/2020	$	230,000			$	200,000
12/31/2021		280,000				260,000

The company’s accountant informs the CEO that because the company reports using LIFO instead of FIFO, gross profit will be lower in 2021. Which of the following statements is correct?

A. The accountant is incorrect because the LIFO reserve has increased in the current year.

B. The accountant is correct.

C. The accountant is incorrect because the choice of LIFO or FIFO does not affect gross profit.

D. The accountant is incorrect because the LIFO reserve has decreased in the current year.

Answer 1

	CALCULATION OF LIFO RESERVE
	Balance as on 12/31/2021 =	$               2,60,000
	Less: Balance Balance as on 12/31/2020	$               2,00,000
	Net Difference (A)	$                  60,000
	CALCULATION OF FIFO RESERVE
	Balance as on 12/31/2021 =	$               2,80,000
	Less: Balance Balance as on 12/31/2020	$               2,30,000
	Net Difference (B)	$                  50,000
	Net Difference (LIFO difference - FIFO Difference) (A-B)	$                  10,000
	IT means lifo reserve has increased in the current year
	As per above explanation,
	Answer = Option A = The accountant is incorrect because the LIFO reserve has increased in the current year.