Indicate whether each of the following statements is true or false. ________ a) The FIFO cost flow method assumes that the company physically rotates inventory so that the oldest inventory is sold first. ________ b) In a period of rising inventory prices, FIFO gives higher cost of goods sold than LIFO. ________ c) Under the weighted-average cost flow method, the average cost per unit equals the cost of goods available for sale divided by the number of units available for sale. ________ d) In a period of declining inventory prices, LIFO will result in higher income tax expense than FIFO. ________ e) In a period of rising inventory prices, FIFO gives higher ending inventory than LIFO does.

Question

What will be an ideal response?

Answer 1

a) F b) F c) T d) T e) T 

a) This is false. Although FIFO mimics the physical flow of most inventory, the choice of a cost flow method does not necessarily conform to the physical flow of inventory.
b) This is false. In a period of rising inventory prices, the cost of the most recent purchases is higher than the cost of older inventory, so LIFO will produce a higher cost of goods sold than FIFO.
c) This is true. Average cost per unit = Cost of goods available for sale ÷ Number of units available for sale.
d) This is true. In a period of declining inventory prices the cost of the most recent purchases is lower than the cost of older inventory, so LIFO will produce a lower cost of goods sold than FIFO, resulting in a higher net income and a higher income tax expense.
e) This is true. In a period of rising inventory prices, the cost of the most recent purchases (which remain in inventory using FIFO) is higher than the cost of older inventory.