Question

Which cost flow method results in (1) the highest inventory amount for the balance sheet, and (2) the highest cost of goods sold for the income statement?

Answer 1

Answer:

1) FIFO method

2) LIFO method

Explanation:

1) The cost flow method which would result in the highest inventory amount for the balance sheet is the FIFO method because in this method the inventory which is bought first is expensed first as cost of goods sold and the inventory bought later is still considered as part of the inventory, because prices increase over time, and inventory which is bought later is more expensive, using the FIFO method would result in the highest amount of inventory because the inventory purchased later would be more expensive.

2) The cost flow method which would result in the highest cost of goods sold would be the LIFO method because in this method the inventory which is bought the last is expensed first as cost of goods and sold and because inventory bought later is more expensive, by using this method the cost of goods sold will have a higher value.