In the context of inventory valuation, which method is least likely to affect the reported net income during periods of rising prices?
Practice Questions
1 question
Q1
In the context of inventory valuation, which method is least likely to affect the reported net income during periods of rising prices?
FIFO
LIFO
Weighted Average
Specific Identification
FIFO (First-In, First-Out) is least likely to affect reported net income during periods of rising prices, as it results in lower cost of goods sold and higher net income.
Questions & Step-by-step Solutions
1 item
Q
Q: In the context of inventory valuation, which method is least likely to affect the reported net income during periods of rising prices?
Solution: FIFO (First-In, First-Out) is least likely to affect reported net income during periods of rising prices, as it results in lower cost of goods sold and higher net income.
Steps: 6
Step 1: Understand what inventory valuation means. It is how a company values its inventory for accounting purposes.
Step 2: Learn about different inventory valuation methods: FIFO (First-In, First-Out), LIFO (Last-In, First-Out), and Average Cost.
Step 3: Know that during rising prices, the cost of older inventory (under FIFO) is lower than the cost of newer inventory.
Step 4: Realize that FIFO sells the oldest inventory first, which means the cost of goods sold (COGS) is lower.
Step 5: Understand that lower COGS leads to higher net income because net income is calculated as sales minus COGS.
Step 6: Conclude that FIFO is least likely to affect reported net income negatively during periods of rising prices because it results in higher net income.
