Question

Match each statement below with the appropriate inventory costing method.

1. This inventory costing method shows cost of goods sold on the income statement at the most current inventory costs during a period of deflation

2. This inventory costing method results in the highest amount of income tax expense reported on the income statement during a period of deflation

3. This inventory costing method results in the highest amount paid to purchase inventory during a period of inflation

Answer 1

Solution:

1. LIFO method assume that newest units are sold first. Thus LIFO method will always recoganize newest inventory cost in cost of goods sold under income statement. Therefore LIFO method shows cost of goods sold on the income statement at the most current inventory costs whether period of inflation of deflation.

2. LIFO method assume that newest units are sold first. Therefore in the period of deflation, the chepest units are sold, therefore LIFO cost of goods sold will consist of cheap cost and will be lowest of three methods. Low cost of goods sold will result in highest net income, thus resulting into highest amount of income tax expense.

3. FIFO method assume that old units are sold first and new units are lying in inventory. Therefore in the period of inflation, inventory will consist of higher price under FIFO. Therefore FIFO method results in the highest amount paid to purchase inventory during a period of inflation.