Question

Assuming purchase costs are rising, determine which statements below are correct regardingthe cost of goods sold under FIFO, LIFO, and weighted average cost flow methods.1.Companies using FIFO will report the highest gross profit and net income. 2.Companies using FIFO will report the smallest cost of goods sold.3.Weighted average cost of goods sold will be between FIFO and LIFO costs of goods sold.4.Companies using FIFO will pay higher taxes than companies using LIFO, assuming all elsebeing equal.

Answer 1

Answer:

1. Companies using FIFO will report the highest gross profit and net income.

2. Companies using FIFO will report the smallest cost of goods sold.

3. Weighted average cost of goods sold will be between FIFO and LIFO costs of goods sold.

4. Companies using FIFO will pay higher taxes than companies using LIFO, assuming all else being equal.

Explanation:

If costs are rising, companies using FIFO will report higher profits simply because they calculate cost of goods sold based on the oldest products which were purchased at a lower cost.

FIFO and LIFO costs will be the extreme points, FIFO showing lowest costs while LIFO will result in the highest costs, while the weighted average will be in between.

Since companies using FIFO report higher profits, they will have to pay more taxes.