If a company uses LIFO, what happens to the ending inventory valuation during a period of deflation?
Practice Questions
1 question
Q1
If a company uses LIFO, what happens to the ending inventory valuation during a period of deflation?
Increases
Decreases
Remains the same
Cannot be determined
Ending inventory valuation increases under LIFO during a period of deflation as older, cheaper costs remain in inventory.
Questions & Step-by-step Solutions
1 item
Q
Q: If a company uses LIFO, what happens to the ending inventory valuation during a period of deflation?
Solution: Ending inventory valuation increases under LIFO during a period of deflation as older, cheaper costs remain in inventory.
Steps: 5
Step 1: Understand what LIFO means. LIFO stands for 'Last In, First Out', which means the most recently purchased items are sold first.
Step 2: Recognize what deflation is. Deflation is when prices of goods decrease over time.
Step 3: Know how LIFO affects inventory. Under LIFO, the cost of the most recent purchases is used to calculate the cost of goods sold, leaving older, cheaper items in inventory.
Step 4: Consider the impact of deflation on costs. During deflation, the older inventory costs are lower than the recent costs.
Step 5: Conclude that since older, cheaper costs remain in inventory, the ending inventory valuation increases under LIFO during deflation.
