What is the effect of using FIFO on the balance sheet during inflation?
Practice Questions
1 question
Q1
What is the effect of using FIFO on the balance sheet during inflation?
Higher assets
Lower liabilities
Higher equity
No effect
Using FIFO during inflation results in higher asset values on the balance sheet due to the higher cost of recent inventory.
Questions & Step-by-step Solutions
1 item
Q
Q: What is the effect of using FIFO on the balance sheet during inflation?
Solution: Using FIFO during inflation results in higher asset values on the balance sheet due to the higher cost of recent inventory.
Steps: 5
Step 1: Understand what FIFO means. FIFO stands for 'First In, First Out'. This means that the oldest inventory items are sold first.
Step 2: Recognize what inflation is. Inflation is when prices increase over time, which means that the cost of goods also rises.
Step 3: Know how FIFO affects inventory costs. Under FIFO, the cost of the inventory that is sold is based on the older, cheaper prices.
Step 4: Realize how this impacts the balance sheet. The remaining inventory on the balance sheet will be valued at the newer, higher prices due to inflation.
Step 5: Conclude that using FIFO during inflation leads to higher asset values on the balance sheet because the remaining inventory is recorded at these higher costs.
