What is the effect of using LIFO during a period of rising prices on the balance sheet?
Practice Questions
1 question
Q1
What is the effect of using LIFO during a period of rising prices on the balance sheet?
Higher inventory value
Lower inventory value
No effect
Cannot be determined
Using LIFO during rising prices results in a lower inventory value on the balance sheet because older, cheaper costs are recorded.
Questions & Step-by-step Solutions
1 item
Q
Q: What is the effect of using LIFO during a period of rising prices on the balance sheet?
Solution: Using LIFO during rising prices results in a lower inventory value on the balance sheet because older, cheaper costs are recorded.
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 happens during rising prices. When prices are rising, the cost of new inventory is higher than older inventory.
Step 3: Identify how LIFO affects inventory costs. Under LIFO, the cost of goods sold will reflect the higher prices of the newer inventory.
Step 4: Determine the impact on the balance sheet. Since LIFO uses the higher costs for sold items, the remaining inventory on the balance sheet will consist of older, cheaper items.
Step 5: Conclude the effect. This results in a lower inventory value on the balance sheet because it shows the older, less expensive costs.
