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In a deflationary environment, which inventory method would likely yield higher
In a deflationary environment, which inventory method would likely yield higher profits?
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Practice Questions
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Q1
In a deflationary environment, which inventory method would likely yield higher profits?
FIFO
LIFO
Weighted Average
None of the above
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In a deflationary environment, FIFO would likely yield higher profits because it matches older, higher costs against revenues.
Questions & Step-by-step Solutions
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Q
Q: In a deflationary environment, which inventory method would likely yield higher profits?
Solution:
In a deflationary environment, FIFO would likely yield higher profits because it matches older, higher costs against revenues.
Steps: 6
Show Steps
Step 1: Understand what deflation means. Deflation is when prices of goods and services decrease over time.
Step 2: Learn about inventory methods. FIFO stands for 'First In, First Out', meaning the oldest inventory is sold first.
Step 3: Recognize that in a deflationary environment, older inventory costs are higher than newer inventory costs.
Step 4: Realize that using FIFO means selling the older, higher-cost inventory first.
Step 5: Understand that when older, higher costs are matched against revenues, it can lead to higher profits.
Step 6: Conclude that in a deflationary environment, using FIFO is likely to yield higher profits.
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