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What is the impact of using LIFO on the balance sheet during a period of rising

Practice Questions

Q1
What is the impact of using LIFO on the balance sheet during a period of rising prices?
  1. Higher current assets.
  2. Lower current assets.
  3. No impact on current assets.
  4. Higher liabilities.

Questions & Step-by-Step Solutions

What is the impact of using LIFO on the balance sheet during a period of rising prices?
  • Step 1: Understand what LIFO means. LIFO stands for 'Last In, First Out'. This means that the most recently purchased items are sold first.
  • Step 2: Recognize that during rising prices, the cost of new inventory is higher than older inventory.
  • Step 3: When using LIFO, the higher costs of the new inventory are used to calculate the cost of goods sold (COGS).
  • Step 4: Because COGS is higher, the remaining inventory on the balance sheet is valued at the older, lower costs.
  • Step 5: This results in lower ending inventory values on the balance sheet.
  • Step 6: Lower ending inventory values mean lower current assets on the balance sheet.
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