What is the main disadvantage of using LIFO for inventory valuation?
Practice Questions
1 question
Q1
What is the main disadvantage of using LIFO for inventory valuation?
Lower net income
Higher ending inventory
Complexity in record-keeping
All of the above
The main disadvantages of using LIFO include lower net income, higher ending inventory values, and increased complexity in record-keeping.
Questions & Step-by-step Solutions
1 item
Q
Q: What is the main disadvantage of using LIFO for inventory valuation?
Solution: The main disadvantages of using LIFO include lower net income, higher ending inventory values, and increased complexity in record-keeping.
Steps: 4
Step 1: Understand what LIFO means. LIFO stands for 'Last In, First Out.' This means that the most recently purchased items are sold first.
Step 2: Recognize that using LIFO can lead to lower net income. When prices are rising, the cost of goods sold is higher, which reduces profit.
Step 3: Note that LIFO can result in higher ending inventory values. The older, cheaper items remain in inventory, making it look like the company has more valuable stock.
Step 4: Acknowledge that LIFO increases complexity in record-keeping. Companies need to track the cost of each batch of inventory separately, which can be complicated.
