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What is the effect of using the LIFO method during a period of inflation?
What is the effect of using the LIFO method during a period of inflation?
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What is the effect of using the LIFO method during a period of inflation?
Higher net income
Lower net income
No effect on net income
Higher ending inventory
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Using LIFO (Last-In, First-Out) during inflation results in lower net income due to higher cost of goods sold.
Questions & Step-by-step Solutions
1 item
Q
Q: What is the effect of using the LIFO method during a period of inflation?
Solution:
Using LIFO (Last-In, First-Out) during inflation results in lower net income due to higher cost of goods sold.
Steps: 6
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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: Know what inflation is. Inflation is when prices of goods and services increase over time.
Step 3: Recognize that during inflation, the cost of new inventory is higher than older inventory.
Step 4: When a company uses LIFO, it sells the newer, more expensive inventory first.
Step 5: Because the cost of goods sold (COGS) is higher when using LIFO during inflation, this leads to lower net income.
Step 6: Lower net income can affect a company's financial statements and tax obligations.
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