What is the primary effect of using FIFO during a period of rising prices?

₹0.0

Question: What is the primary effect of using FIFO during a period of rising prices?

Options:

Correct Answer: Higher net income

Solution:

Using FIFO during rising prices results in higher net income because older, cheaper costs are matched against current revenues.

What is the primary effect of using FIFO during a period of rising prices?

What is the primary effect of using FIFO during a period of rising prices?

Step 1: Understand FIFO. FIFO stands for 'First In, First Out'. This means that the oldest inventory costs are used up first when calculating expenses.
Step 2: Recognize rising prices. When prices are rising, the cost of new inventory is higher than the cost of older inventory.
Step 3: Calculate costs. Under FIFO, when you sell products, you are using the older, cheaper costs for your expenses.
Step 4: Compare revenues and expenses. Since your revenues are based on the current, higher prices, but your expenses are based on the older, lower costs, this creates a larger profit margin.
Step 5: Determine net income. Higher profit margins lead to higher net income because you are subtracting lower costs from higher revenues.

No concepts available.