Question

Identify the inventory costing method best described by each of the following separate statements. Assume a period of increasing costs. results in
a. Results in the highest cost of goods sold.
b. Yields the highest net income.
c. Has the lowest tax expense because of reporting the lowest net income.
d. Better matches current costs with revenues,
e. Precisely matches the costs of items with the revenues they generate.

Answer 1

Answer:

LIFO is a form of inventory costing that assumes that more recent stock is sold first and early stock sold last. FIFO is the opposite of this and believes earlier stock is sold first and later stock is sold last.

Weighted average uses a weighted price for all available stock and specific identification uses the exact cost of the inventory.

a. Results in the highest cost of goods sold. ⇒ LIFO

This is LIFO because the closing stock that is subtracted from the cost of goods sold will be earlier stock and as costs are rising, it will be lower than the purchases.

b. Yields the highest net income. ⇒ FIFO

Because FIFO gives a lower Cost of goods sold as opposed to LIFO, it gives a higher income.

c. Has the lowest tax expense because of reporting the lowest net income.⇒ LIFO

Reports lowest income due to high cost of goods sold.

d. Better matches current costs with revenues. ⇒ LIFO

LIFO uses the current inventory which would reflect the current cost of inventory so it matches current costs with revenue.

e. Precisely matches the costs of items with the revenues they generate. ⇒ Specific Identification.

Uses the exact cost of the inventory so precisely matches costs.