If a company uses FIFO during periods of inflation, what effect does it have on the balance sheet?
Practice Questions
1 question
Q1
If a company uses FIFO during periods of inflation, what effect does it have on the balance sheet?
Higher inventory values
Lower inventory values
No effect on inventory values
Increased liabilities
Using FIFO during periods of inflation results in higher inventory values on the balance sheet because older, cheaper costs are recorded.
Questions & Step-by-step Solutions
1 item
Q
Q: If a company uses FIFO during periods of inflation, what effect does it have on the balance sheet?
Solution: Using FIFO during periods of inflation results in higher inventory values on the balance sheet because older, cheaper costs are recorded.
Steps: 6
Step 1: Understand FIFO - FIFO stands for 'First In, First Out'. This means that the oldest inventory items are sold first.
Step 2: Recognize inflation - Inflation means that prices are generally rising over time.
Step 3: Identify inventory costs - When a company buys inventory, it pays different prices over time. In inflation, newer inventory costs more than older inventory.
Step 4: Apply FIFO in inflation - Under FIFO, when the company sells inventory, it records the cost of the older, cheaper items first.
Step 5: Effect on balance sheet - Since the older items are cheaper, the remaining inventory on the balance sheet will be valued at the higher, more recent prices.
Step 6: Conclusion - Therefore, using FIFO during inflation leads to higher inventory values on the balance sheet.
