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What is the primary effect of using FIFO during inflationary periods?
What is the primary effect of using FIFO during inflationary periods?
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What is the primary effect of using FIFO during inflationary periods?
Higher net income
Lower net income
No effect on net income
Higher inventory valuation
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Using FIFO during inflationary periods typically results in higher net income due to lower cost of goods sold.
Questions & Step-by-step Solutions
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Q: What is the primary effect of using FIFO during inflationary periods?
Solution:
Using FIFO during inflationary periods typically results in higher net income due to lower cost of goods sold.
Steps: 6
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Step 1: Understand FIFO. FIFO stands for 'First In, First Out'. This means that the oldest inventory items are sold first.
Step 2: Recognize inflation. Inflation is when prices of goods and services increase over time.
Step 3: Connect FIFO and inflation. When prices rise, the older inventory (which was bought at lower prices) is sold first.
Step 4: Calculate cost of goods sold (COGS). Since the older, cheaper items are sold first, the COGS will be lower.
Step 5: Determine net income. With lower COGS, the revenue from sales minus COGS results in a higher net income.
Step 6: Conclude the effect. Therefore, using FIFO during inflation leads to higher net income.
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