Question

For each of the following cases, state whether the statement is true for LIFO or for FIFO. Assume that prices are rising. (a) select an option results in a higher quality of earnings ratio. (b) select an option results in higher phantom profits. (c) select an option results in higher net income. (d) select an option results in lower taxes. (e) select an option results in lower net cash provided by operating activities.

Answer 1

Answer:

• LIFO : results in a higher quality of earnings ratio.
• FIFO : in higher phantom profits.
• FIFO : results in higher net income.
• LIFO : results in lower taxes.
• FIFO : results in lower net cash provided by operating activities.

Explanation:

• FIFO states that first goods brought are the first to be sold and the inventory consists of the most recent purchases and LIFO assumes that the last goods are purchased and first sold.

• Thus LIFO results in a higher earning ratio and in a lowering of the taxes and FIFO at higher net incomes and lowers the net cash provided for the operating activities.