Which method would provide a better matching of current costs with current revenues during inflation?
Practice Questions
1 question
Q1
Which method would provide a better matching of current costs with current revenues during inflation?
FIFO
LIFO
Weighted Average
Specific Identification
LIFO provides a better matching of current costs with current revenues during inflation as it matches the most recent costs against revenues.
Questions & Step-by-step Solutions
1 item
Q
Q: Which method would provide a better matching of current costs with current revenues during inflation?
Solution: LIFO provides a better matching of current costs with current revenues during inflation as it matches the most recent costs against revenues.
Steps: 6
Step 1: Understand that during inflation, prices of goods and services increase over time.
Step 2: Learn about inventory accounting methods, specifically LIFO (Last In, First Out) and FIFO (First In, First Out).
Step 3: Recognize that LIFO means the most recently purchased items are sold first.
Step 4: Realize that when using LIFO during inflation, the costs of the most recent (and usually higher) inventory are matched against current revenues.
Step 5: Compare this with FIFO, where older, cheaper costs are matched against current revenues, which may not reflect the current economic situation.
Step 6: Conclude that LIFO provides a better matching of current costs with current revenues during inflation because it uses the latest costs.
