In a period of deflation, which inventory method would likely show the highest net income?
Practice Questions
1 question
Q1
In a period of deflation, which inventory method would likely show the highest net income?
FIFO
LIFO
Weighted Average
Specific Identification
In a period of deflation, FIFO would likely show the highest net income as it matches older, higher costs against current revenues.
Questions & Step-by-step Solutions
1 item
Q
Q: In a period of deflation, which inventory method would likely show the highest net income?
Solution: In a period of deflation, FIFO would likely show the highest net income as it matches older, higher costs against current revenues.
Steps: 5
Step 1: Understand what deflation means. Deflation is when prices of goods and services decrease over time.
Step 2: Learn about inventory methods. FIFO (First In, First Out) means the oldest inventory costs are used first when calculating expenses.
Step 3: Recognize how costs affect net income. When costs are lower, using older, higher costs (like in FIFO) means expenses are higher, which can lead to higher net income.
Step 4: Compare FIFO with other methods like LIFO (Last In, First Out). LIFO uses the most recent costs first, which would be lower in a deflation period, leading to lower net income.
Step 5: Conclude that in deflation, FIFO shows higher net income because it matches older, higher costs against current revenues.
