Question

Assuming purchase costs are declining and a periodic inventory system is used, determine the statements below which correctly describe what is happening to cost of goods sold under FIFO, LIFO and weighted average cost flow methods. (Check all that apply.)a. Companies using FIFO will report the smallest cost of goods sold.
b. Companies using FIFO will report the highest gross profit and net income.
c. Companies using LIFO will report the smallest cost of goods sold.
d. Weighted average cost of goods sold will be between FIFO and LIFO costs of goods sold.
e. Companies using FIFO will pay higher taxes than companies using LIFO, assuming all else being equal

Answer 1

Answer:

Statements (c) and (d) are correct statements.

Explanation:

When the prices are decreasing, the inventory sold under LIFO basis would report lowest cost of goods sold because the previously bought goods were expensive and LIFO carry forwards inventory costs that were recently purchased (inexpensive). So the cost of goods sold would decrease and as a result the net income and the profits would increase. Due to increased profits, the company will have to pay more taxes. The scenario for FIFO basis would be totally oposite.

As we know the Weighted average cost basis records cost of goods sold using an average cost of inventory which means the cost of goods sold will be between FIFO and LIFO costs of goods sold.

Answer 2

Answer:

c. Companies using LIFO will report the smallest cost of goods sold.  TRUE, Companies using LIFO method will increase profits (smaller COGS) but will over estimate inventories.

d. Weighted average cost of goods sold will be between FIFO and LIFO costs of goods sold.  TRUE, it averages costs.

Explanation:

If purchase costs are decreasing, then the LIFO method is more appropriate, instead if purchase costs are steadily increasing, the FIFO method is more appropriate. The weighted average cost is better when purchase costs are relatively stable.

When the purchasing costs are decreasing, the LIFO method under estimates COGS, over estimates inventories, increases profits but also increases taxes.