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| Question
4-10 |
|
|
| 4–10. Compare and contrast the effects of LIFO
and FIFO inventory costing methods on earnings in an inflationary period. |
|
| Last In
First Out (LIFO) means the last items entered into the inventory (which may
be at a higher price) would be the first to be taken out, increasing the
COGS. This means the lower priced
items would remain in the inventory decreasing the asset account. |
| First In
First Out (FIFO) means the first items entered into the inventory (which may
have been entered at a lower price) would be the first taken out decreasing
the COGS. This means the higher priced
items would remain in the inventory increasing the asset account. |
| In an
inflationary period FIFO would reflect an increase in income thereby causing
higher taxes. Companies are not
allowed to swith from FIFO to LIFO depending on the economy, they must
continue valuing their inventory using the same method. |
